Transfer Pricing in Indonesia: Rules for Foreign-Owned Companies

Your Indonesian subsidiary just received a request from its parent company in Singapore to sell finished goods at a price 40% below market rate. Commercially, the group benefits. But from the Indonesian tax authority’s perspective, that transaction just triggered a transfer pricing review.

This is the reality that thousands of foreign-owned companies operating in Indonesia encounter every year. Transfer pricing in Indonesia is not a fringe compliance topic reserved for large multinationals. It applies to any company that transacts with affiliated entities, whether that transaction involves physical goods, management fees, intellectual property licensing, or intercompany loans.

This guide breaks down the current regulatory framework, what documentation companies are required to prepare, how the Directorate General of Taxes (Direktorat Jenderal Pajak or DJP) conducts audits, and the practical steps foreign-owned companies can take to stay compliant.

What Is Transfer Pricing and Why Does It Matter in Indonesia?

Transfer pricing refers to the pricing of transactions between related parties within the same corporate group. These transactions can include the sale of goods, provision of services, use of intellectual property, and intercompany financing arrangements.

The concern from a tax authority’s standpoint is straightforward: if a parent company in a lower-tax jurisdiction charges an artificially high royalty to its Indonesian subsidiary, the subsidiary reports lower profit and pays less corporate income tax in Indonesia. The Indonesian government loses revenue.

To prevent this, Indonesia requires that related-party transactions be priced according to the Arm’s Length Principle or ALP (Prinsip Kewajaran dan Kelaziman Usaha or PKKU). In plain terms, this means the pricing between affiliated parties must reflect what two independent, unrelated parties would agree to under comparable market conditions.

The Regulatory Foundation: PMK 172/2023

The governing regulation for transfer pricing in Indonesia is Minister of Finance Regulation No. 172 of 2023 (Peraturan Menteri Keuangan or PMK 172/2023), which came into force on 29 December 2023 and took full effect for Tax Year 2024 documentation.

PMK 172/2023 is a consolidation regulation. It replaced three previously separate regulations:

• PMK 213/PMK.03/2016, which covered Transfer Pricing Documentation (TP Doc) requirements
• PMK 49/PMK.03/2019, which governed the Mutual Agreement Procedure (Prosedur Persetujuan Bersama)
• PMK 22/PMK.03/2020, which addressed the Arm’s Length Principle and Advance Pricing Agreements (Kesepakatan Harga Transfer)

By consolidating these three regulations into a single framework, PMK 172/2023 is now the definitive transfer pricing rulebook in Indonesia. Its underlying legal basis is Article 18 of the Income Tax Law (Undang-Undang Pajak Penghasilan), and it is broadly aligned with the OECD Transfer Pricing Guidelines 2022 and the Base Erosion and Profit Shifting (BEPS) Action Plan.

Who Is Subject to Transfer Pricing Rules in Indonesia?

A company is subject to Indonesian transfer pricing rules when it has a Special Relationship with another party. PMK 172/2023 defines this relationship broadly. It applies when:

• One party controls or is controlled by another, directly or indirectly
• Two or more parties are under the same common control
• One party controls another through management or technology-sharing arrangements
• One individual has direct or indirect involvement in the management or operations of two or more entities
• Parties are known or declare themselves to be part of the same business group

A notable expansion under PMK 172/2023 is that even transactions between unrelated parties can fall within the transfer pricing framework if an affiliated entity influences the pricing or the choice of transaction counterpart. This closes a gap that existed under previous regulations.

For foreign-owned companies, practically all transactions with their overseas parent, sister companies, or subsidiaries fall within this scope.

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The Arm’s Length Principle: How It Works in Practice

The ALP is the central test for every related-party transaction. Under PMK 172/2023, the obligation to price transactions at arm’s length applies regardless of whether a company meets the documentation thresholds. Even a company that falls below the threshold for preparing formal TP documentation is still exposed to DJP adjustments if its controlled transactions are not priced correctly.

PMK 172/2023 also introduces an Ex-Ante Approach requirement for certain transaction categories. This means taxpayers are required to determine that their transfer prices are arm’s length before or at the time the transaction occurs, using information available at that point. Post-transaction justifications carry significantly less weight under the current framework.

The preliminary assessment must be conducted before the formal TP analysis for six specific transaction types:

• Service transactions
• Financial transactions
• Intangible asset transactions
• Asset transfer transactions
• Business restructuring transactions
• Cost contribution arrangements

For service transactions in particular, PMK 172/2023 requires companies to demonstrate that the service actually benefits the recipient, that the cost is not a shareholder activity (such as governance or compliance costs that benefit the group rather than the subsidiary), and that the pricing is consistent with what an independent party would pay.

Transfer Pricing Methods Accepted Under PMK 172/2023

Article 9 of PMK 172/2023 sets out the accepted methods for determining arm’s length pricing. Companies must select the most appropriate method based on a functional analysis of the transaction.

Primary Methods

• Comparable Uncontrolled Price Method or CUP (Metode Harga Pasar Sebanding): Compares the price in a controlled transaction to the price in a comparable uncontrolled transaction. CUP is the preferred method and takes precedence over all others when it can be applied with a similar degree of reliability.
• Resale Price Method or RPM (Metode Harga Jual Kembali): Compares the gross profit margin of the tested party to that of independent comparable companies.
• Cost Plus Method or CPM (Metode Biaya Plus): Compares the mark-up on costs in the controlled transaction to that applied in comparable uncontrolled transactions.

Alternative Methods

• Profit Split Method or PSM (Metode Pembagian Laba): Used where both parties make unique and valuable contributions and the business activities are highly integrated.
• Transactional Net Margin Method or TNMM (Metode Laba Bersih Transaksi): Compares the operating profit margin of the tested party with independent comparables. Widely used in practice because reliable gross-margin comparables are often difficult to find.
• Comparable Uncontrolled Transaction Method or CUT (Metode Transaksi yang Tidak Dipengaruhi Hubungan Istimewa): Applied to royalty rates, interest rates, or service fee percentages.
• Tangible and intangible asset valuation methods
• Business valuation method

Under the method priority rules, if CUP and CUT can both be applied at the same level of reliability, they take precedence over all other methods. Among the remaining methods, RPM and CPM take priority over TNMM and PSM.

PMK 172/2023 also shifts the default from multiple-year analysis to single-year analysis. If a company wants to use multiple-year comparable data, the burden of proof sits with the taxpayer to demonstrate that this improves comparability.

Transfer Pricing Documentation Requirements

Who Must Prepare Documentation

Companies must prepare Transfer Pricing Documentation if they meet any of the following thresholds in the preceding fiscal year:

The final criterion is important for foreign-owned companies. If a company transacts with a parent or affiliate based in a jurisdiction whose corporate income tax rate is lower than Indonesia’s current rate of 22%, the documentation obligation applies regardless of transaction value.

Three-Tiered Documentation Structure

Indonesia follows the three-tier documentation framework aligned with OECD BEPS Action 13:

Master File (Dokumen Induk): Provides a high-level overview of the multinational group’s global business, organizational structure, value chain, and group-level transfer pricing policies. Prepared at the group level and translated into Bahasa Indonesia.

Local File (Dokumen Lokal): Details the Indonesian entity’s related-party transactions, including transaction amounts, counterparty information, functional analysis, benchmarking data, and the transfer pricing method applied. Under PMK 172/2023, the Local File must also include documentation of the preliminary assessment stages for the six specified transaction types. Prepared in Bahasa Indonesia.

Country-by-Country Report or CbCR (Laporan per Negara): Required for the ultimate parent entity of a business group with consolidated gross revenue of at least IDR 11 trillion in the preceding fiscal year. Indonesian constituent entities of foreign-parented groups must also submit a CbCR notification form to the DJP.

Filing Deadlines

The Master File and Local File must be completed no later than four months after the end of the fiscal year. For companies with a December year-end, this means the documentation must be ready by the end of April. The documentation is not submitted with the annual corporate income tax return (SPT Tahunan Pajak Penghasilan Badan), but a statement of availability must be attached to the return confirming that the documents exist.

If the DJP requests the documentation during a compliance monitoring process or tax audit, the company has a maximum of one month from the date of the request to submit it. Failure to meet this one-month deadline is treated as a presumptive violation of the ALP.

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How the DJP Audits Transfer Pricing

Indonesia’s transfer pricing audit environment has become considerably more rigorous since the introduction of PMK 172/2023. The DJP has moved from a posture of checking whether documentation exists to actively evaluating whether the analysis is substantively sound.

Key features of the audit approach include:

Comparability analysis scrutiny

PMK 172/2023 explicitly requires geographic comparability, meaning comparable data from the same country or jurisdiction as the tested party is preferred. Indonesian subsidiaries using pan-Asian comparables from databases like Orbis face a higher risk of challenge if local Indonesian comparables are available.

Presumption of non-compliance for missing documentation

If a company fails to provide TP documentation within one month of the DJP’s request during an audit, the DJP may presume that the related-party transactions do not comply with the ALP.

TP adjustments treated as taxable dividends

Where the DJP makes a transfer pricing adjustment, PMK 172/2023 specifies that the adjustment is treated as an indirect profit repatriation and is subject to tax as a dividend. An exception applies if the company makes a cash payment equal to the adjustment amount before the issuance of a Tax Assessment Letter (Surat Ketetapan Pajak or SKP), or if the company agrees to the DJP’s determination during the audit.

VAT implications

The DJP is also authorized to adjust the VAT (Pajak Pertambahan Nilai or PPN) tax base where the selling price to a related party is below the arm’s length market price.

Penalties for Non-Compliance

The consequences of transfer pricing violations in Indonesia are layered and can be substantial.

For failure to maintain adequate documentation, the DJP may impose an administrative penalty of up to 2% of gross revenue for each non-compliant year.

Where a transfer pricing adjustment results in underpaid tax, an additional penalty of 50% of the underpaid amount applies for negligence. For cases involving intentional understatement, this rises to 100% of the underpaid tax, plus monthly interest of 2%.

For Country-by-Country Reporting violations, a fixed penalty of IDR 1 million applies, with the possibility of a further audit and a 50% increase penalty if the audit reveals a transfer pricing adjustment.

In serious cases involving deliberate tax evasion, criminal prosecution with potential imprisonment is possible under Indonesia’s General Provisions and Tax Procedures Law (Undang-Undang Ketentuan Umum dan Tata Cara Perpajakan or UU KUP).

Advance Pricing Agreements and Mutual Agreement Procedures

Two mechanisms exist for companies seeking greater certainty on their transfer pricing positions.

An Advance Pricing Agreement or APA (Kesepakatan Harga Transfer) is an agreement between the taxpayer and the DJP on the appropriate transfer pricing methodology for a defined set of transactions over a period of three to five years. Indonesia offers unilateral APAs (involving only the Indonesian tax authority), bilateral APAs (involving two tax authorities), and multilateral APAs. The process typically takes 24 to 36 months due to the level of analysis required.

The Mutual Agreement Procedure or MAP (Prosedur Persetujuan Bersama) is available where a transfer pricing adjustment by the DJP results in double taxation. A taxpayer may invoke the MAP process under Indonesia’s applicable tax treaty to seek resolution with the counterpart jurisdiction. PMK 172/2023 extended the time available for MAP discussions and allows the process to continue until a judicial review decision is issued by the Supreme Court.

High-Risk Transaction Categories for Foreign-Owned Companies

Based on the DJP’s audit focus areas and the expanded scope of PMK 172/2023, the following transaction types carry elevated scrutiny for Foreign-Owned Limited Liability Company (Perseroan Terbatas Penanaman Modal Asing or PT PMA) and other foreign-invested entities:

Intra-group service fees. Management fees, technical assistance fees, and shared service charges between a foreign parent and its Indonesian subsidiary are a consistent audit target. The DJP requires proof that the service was actually rendered, that it provided a genuine economic benefit to the Indonesian entity, and that it is not a shareholder activity charged to the subsidiary.

Royalties and intellectual property licensing. Companies paying royalties to a related party for the use of trademarks, patents, or software licenses must demonstrate the genuine value of the intangible and that the royalty rate reflects an arm’s length arrangement. The DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) analysis framework is now relevant here.

Intercompany loans and interest payments. PMK 172/2023 provides more detailed guidance on the arm’s length pricing of financial transactions. The DJP may also reclassify related-party debt as equity if the company’s debt-to-equity ratio is inconsistent with what independent parties would accept, in which case interest payments on the reclassified debt become non-deductible.

Commodity transactions. For commodity exports or imports involving related parties, the CUP method is strongly preferred. Companies in mining, agriculture, or manufacturing with intercompany commodity flows face the highest documentation scrutiny.

Business restructurings. Where a foreign parent restructures its Indonesian subsidiary’s functions, such as converting it from a full-risk distributor to a limited-risk distributor, or from a manufacturer to a contract manufacturer, PMK 172/2023 requires a detailed preliminary assessment justifying the restructuring and its terms.

Practical Steps for Foreign-Owned Companies

Getting transfer pricing compliance right in Indonesia requires action well before the tax filing deadline.

Map your related-party transactions at the start of each tax year. Identify all intercompany flows: goods, services, financing, royalties, and guarantees. Determine which transactions require a preliminary assessment under PMK 172/2023 before they are executed.

Apply the Ex-Ante approach properly. Set and document your arm’s length pricing before or at the time each transaction occurs. Do not rely on retrospective justification when preparing the Local File at year-end.

Use Indonesian comparables where available. The DJP’s preference for geographic comparability means a benchmarking study built on Indonesian companies will be more defensible than one relying on regional or global comparables.

Prepare documentation in Bahasa Indonesia. Both the Master File and the Local File must be in Bahasa Indonesia. Translation quality matters because poor translations introduce ambiguity that auditors may exploit.

Attach a statement of availability to your annual tax return. This is a separate requirement from preparing the documentation itself. Missing this attachment creates a compliance gap even if the underlying TP documentation is complete.

Consider an APA for high-value or recurring transactions. For companies with significant intercompany flows in categories that attract consistent DJP scrutiny, a unilateral or bilateral APA provides multi-year certainty at the cost of an upfront investment in the negotiation process.

How XPND Supports Foreign-Owned Companies with Transfer Pricing Compliance

Transfer pricing compliance sits at the intersection of tax, legal, and operational management. For a foreign-owned company navigating this in Indonesia, the practical challenge is not just understanding the rules but executing across all the required steps simultaneously.

XPND’s Tax Compliance service is specifically structured for PT PMA and other foreign-invested entities operating in Indonesia. Our advisors, many of whom carry experience from Big-4 consulting and regulatory backgrounds, support companies in mapping related-party transaction exposure, preparing compliant TP documentation in Bahasa Indonesia, and responding to DJP inquiries.

If your company is in the process of setting up operations, our incorporation teams across Jakarta, Bali, Surabaya, Semarang, and Batam can advise on structuring your Indonesian entity in a way that considers transfer pricing obligations from the outset. You can read more about how foreign investors approach the setup process in our guides to setting up business in Surabaya and setting up business in Bali.

For companies already operating and facing documentation deadlines or audit exposure, contact XPND for a confidential assessment of your current position.