Transfer Pricing: Get to Know This Financial Term and Its Purpose!
December 2022
Globally, over 60 countries have adopted transfer pricing rules based on the framework delineated in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, published by the Organization for Economic Cooperation and Development (OECD).
Transfer pricing is a policy set by a company to determine the transfer price for a transaction, whether the price is for goods, services, intangible assets, or financial transactions carried out by the company. Transfer pricing can also be interpreted as the price charged by individual business units to multi-unit companies for transactions that occur between them.
Purpose of Implementing Transfer Pricing
What are the reasons for implementing transfer pricing? Here are 7 objectives:
- Optimization of global income after tax
- Evaluation of the performance of foreign company branches
- Striving for a secure competitive position
- Reducing financial risk
- Manage cash flow in the company's branches
- Reducing the risk of government takeovers
- Reducing the burden of taxes and import duties
Transfer pricing is a security effort which aims to maximize global income; secure the competitive position of a company's branches; evaluate the performance of foreign company branches; avoid foreign exchange controls; reduce monetary risk; manage cash flows of company branches; maintain good relations with local administrations; reduce the risk of takeovers by the government, and reduce expenses imposition of taxes and import duties.
Several things that encourage the implementation of transfer pricing in Indonesia, including:
- Tax object reduction
- Decreasing the effect of depreciation
- Easing the effect of restrictions on foreign ownership
- Reinforce demands for price increases or protection against import rivals
- Minimize the effects of restrictions and uncertainties on the risks of foreign companies' business activities
To tackle the potential for cross-border controlled transactions distorting their taxable income, tax authorities in many countries are able to adjust reported intragroup transfer prices that differ from those that would have been charged by non-related enterprises dealing on an arm’s-length principle. With the Tax Office increasingly targeting companies for transfer pricing adjustments, managing related party transactions has become a vital part of your tax reporting regimen.
We offer advice and assistance on the following:
- Development of a transfer pricing defense strategy. This may include preparing transfer pricing documentation that covers at least a description of your business, together with a detailed functional analysis, and benchmarking.
- Providing support in tax audits, objections, or appeals. Transfer pricing disputes can only be effectively dealt with by transfer pricing specialists such as our participant firms can provide.
- Mitigate transfer pricing risks by recommending rearrangement of your related-party transactions to meet national tax regulations and practice.
Moores Rowland Indonesia and Praxity firms provide both national and international tax services to a diverse global client-base. We work with global owner-managed businesses and European listed companies, but also with local companies, and private individuals. So wherever you are located, we can support you with local and global advice. For more information on our services, please email: contact-jakarta@moores-rowland.com or contact-bali@moores-rowland.com.
**By: Stefani W. Anggraeni — Marketing Communications & Social Media Specialist