New rule on APA (Advance Pricing Agreement)

Directorate General of Taxes (DGT)  has  issued DGT Regulation No PER-69/PJ/2010 regarding  APA  as implementing regulation of  Article 18(3a) Income Tax Law.   Pursuant to Article 18(3a) Director General is authorized to conclude APA, evaluate , and renegotiate it when expired.

However, Government Regulation No 74 Year 2011 requires that procedure for APA should be regulated under Minister of Finance (MoF) Regulation.  Therefore,  MoF recently issued MoF Reg.  No.   7/PMK.03/2015  on 12 Janua1y 2015 regarding the formation and implementation of an Advance Pricing Agreement (AP A).  PMK-7 will be effective from 90 days after the enactment date (i.e. 12 April 2015) and applicable for all outstanding and future APA applications.

I.          APA process

PMK-7 sets out the APA process into the following broad stages:

•     Establishment stage,  which includes the following process:

•   The implementation stage which includes the evaluation of the AP A through an Annual Compliance Report (ACR) and the potential to submit a new AP A application for subsequent years.

The stages are relevant for both unilateral (UAP A) and bilateral APAs (BAP A).  To implement PMK-7, DGT will issue DGT Reg.  to elaborate in more detail guidance.

II.        Validity period

                In accordance with PMK-7, a UAPA will be valid effectively for a maximum of three years. However, in relation to BAPAs, the validity period can be extended to a maximum of four years.

III.     Who can apply for APA ?

Under PMK-7, an APA application can be submitted by:

·         An Indonesian taxpayer or a foreign taxpayer who has a PE in Indonesia ; or

·         A taxpayer of a treaty country or jurisdiction through their tax authority.

Note : for an Indonesian taxpayer or a foreign taxpayer who has a PE  in Indonesia,  it must have been operating or conducting business in Indonesia for at least three years prior to applying for AP A.

IV.     What is the purpose of Preliminary Discussion ?

The purpose of the preliminary discussions  is to discuss with taxpayer and understand (among other things):

1.  The period of the APA 
2.  The merits of an APA and  to determine whether it  will be a UAP A or BAPA;
3. Understanding  taxpayer's business operations, related party transactions,  TP methodology chosen;
4. TP documentation and supporting documents or information

During the preliminary discussions, taxpayers will be required to provide documents and other information to the DGT as listed in PMK-7 .  In addition,  PMK-7 adds a  new paragraph requiring that an APA must be:

1.  Based on a real  transaction and/or planned transaction ;
2. In line with TP guidelines and regulations; and
3. No intention  for solely minimizing tax cost.

The preliminary discussion request must now be submitted  in written at least six months prior to the beginning of the tax year covered in the APA  and  it does not bind the DGT or taxpayer to proceed to further stages.

V.       How do we know  that we can continue to the next step ?

PMK-7 now requires the DGT to confirm whether or not a taxpayer can continue to the APA application stage (This stage is newly introduced by PMK-7) by :

•        issuing  an invitation letter to the taxpayer no later than one month prior to the tax year that will be covered in the APA  if DGT agrees to continue to the APA discussion stage

•        issuing a notification letter to the taxpayer no later than one month before the end of the tax year if DGT declines to progress further

Given the timelines provided in the regulation, taxpayers should  prepare well in advance so that they can meet the timelines which will have an impact on the start and duration of an APA.

VI.     When APA application should be file ?

After receiving invitation letter, PMK-7 requires taxpayers to submit the completed AP A application before the start of the tax year to be covered in the APA. If a taxpayer does not file  APA application before the start of the intended APA period, the years to be covered in the APA will be reduced by one year. However, if taxpayers do not file  the application within the first year of the intended APA period, the APA application will not be continued  to the APA discussion stage.

VII.  APA discussion

Once a taxpayer has entered into the A A discussion stage,  DGT will form an APA Discussion Team. PMK-7 sets out the duties of this discussion team.  The recommendation  produced by  the APA Discussion Team will be submitted to the Director General  and will be discussed together with a DGT Quality Assurance Team.

The  APA discussion   between DGT and taxpayers   will cover topics as follows:

a)       Scope of the transaction and tax year to be covered
b)       Comparability analysis, selection, and determination of comparable;
c)       Determination of appropriate  TP method;
d)      Conditions and factors affecting  critical assumptions in determining the TP method; and
e)      Explanation on whether a double taxation exists or not.

Where the APA is a BAPA, the discussions will occur  not only with the taxpayer but also with the Competent Authorities (in accordance with  MAP regulation/procedure) .

The APA discussion stage should be  conducted within one year of  the APA application received (UAPA) or in accordance with the timeframe under the MAP proceedings (BAPA).

The result of UAPA discussion may result in:

1. An agreement with a taxpayer  to be continued with  drafting of an APA document.
2. Disagreement with a taxpayer  and   the APA application is deemed void.

The result of BAPA discussion may result in:

1.    Agreement with a competent authority of a treaty partner  to be continued with drafting Mutual Agreement
2. Disagreement with a competent authority of a treaty partner  that may  result in either the APA discussion will continue to UAPA or the APA discussion is terminated.

VIII.   What is  document of APA ?

The APA document will include all aspects of the APA including transactions to be covered,  tax years covered, agreed TP methodology , arm’s length price,  critical assumptions, secrecy, dispute settlement, etc.  Then DGT will issue a decree to formalize APA document.

IX.     How is the implementation and renewal of APA ?

The UAPA is implemented starting  from the tax year when the AP A document  is agreed.  For  BAPA, the APA is implemented in accordance with the Mutual Agreement.

To evaluate the implementation of APA,  Taxpayer shall submit   an Annual  Compliance Report (ACR)  within four months of the end of the relevant tax year. The ACR should contain detailed description of the taxpayer's  compliance  to the APA document  such as  accuracy and consistency in applying the agreed method,  accuracy  of   factors affecting the critical assumptions , etc.

Taxpayers  have to  notify  DGT  whenever  factors affecting the critical assumptions in determining TP method exist, such as changes in business operation, changes in law/regulation/government policy, exchange rate, etc.    If Taxpayer  fail  to do this, it may result  in the DGT  mayl reconsider  or may cancel the APA. 

Renewal of APA can be carried out in the last tax year covered in the APA and it is treated similarly to an APA application under the establishment stage. DGT  may  consider the agreements  have been made in the existing APA  to process  the renewal  APA application.