What is PMK 172/2023?
PMK 172/2023 is the new Indonesia transfer pricing guideline for both taxpayers and tax authorities. It responds to amendments in the Income Tax Law and the General Provisions and Procedures of Taxation Law that stem from the Harmonization of Tax Regulations Law and its implementing regulations, GR-50 and GR-55 of 2022.
An omnibus overhaul
PMK 172/2023 takes an omnibus approach. It unifies compliance, documentation and the authorities of the Directorate General of Taxes (DGT) in one regulation. It replaces the previous guidelines with more precise and more comprehensive directives.
What it means for your business
Companies with related party transactions should review their existing transfer pricing policies and documentation against PMK 172 Tahun 2023. See how we support clients with Transfer Pricing Documentation, and read our related update on Secondary Adjustment in Indonesia.
Key changes in PMK 172/2023
How PMK 172/2023 implements PKKU
- Detailed industry analysis. Taxpayers should analyse product characteristics, industry-specific factors, competitive stages and location advantages. This helps distinguish affiliated from independent transaction conditions, which is crucial for accurate comparability analysis.
- Selecting the tested party. The regulation recommends the entity with simpler functions, assets and risks (FAR). A more complex entity may still be the tested party when the method used and data availability require it, which keeps the analysis practical.
Which transfer pricing methods does PMK 172/2023 prefer?
- Single-year vs. multi-year data. Single-year data is the default, but multi-year data is allowed to improve the comparability of comparable transactions.
- CUP and CUT methods. When all methods are equally reliable, the Comparable Uncontrolled Price (CUP) and Comparable Uncontrolled Transaction (CUT) methods are preferred. This fixes the previous rules, which implied a reliability gap between CUP and CUT despite their similar characteristics.
- Profit Split Method (PSM). The regulation explains PSM in more detail, including implementation steps, what counts as “unique contributions” and the data needed to support a PSM analysis.
Primary adjustment: what can the DGT recalculate?
The DGT may recalculate income and deductions to ensure PKKU compliance. This applies when taxpayers apply PKKU incorrectly, skip procedural steps or set transfer prices incorrectly. PMK 172/2023 also requires the DGT to apply the regulation rigorously when it determines transfer prices in a primary adjustment.
Secondary adjustment and repatriation
The difference between PKKU-compliant income and reported income is treated as a dividend and taxed (secondary adjustment), for both domestic and international transactions. Under PMK 172/2023, a secondary adjustment is not required if:
- the income difference is repatriated to the taxpayer, or
- the taxpayer agrees to the primary adjustment made by the Director General of Taxes.
Repatriation must be made in cash or cash equivalents before the tax assessment letter is issued. Further clarity on this practice is still needed, but it gives taxpayers crucial relief from severe penalties as long as they can repatriate.
VAT implications of primary adjustments
Primary adjustments to related party transactions may also trigger VAT. If the selling price is below fair market price at the time of delivery, the VAT adjustment is computed using that price. Additional VAT applies when the DGT can allocate adjustments to individual transactions. Buyers can still credit input VAT based on the value in the original tax invoice.
Corresponding adjustments
Corresponding adjustments are allowed for both domestic and international transactions. For domestic transactions, PMK 172/2023 clarifies that they can be made through revised tax returns, tax audits or revised tax assessment letters (SKP), a point that was previously ambiguous.
Mutual Agreement Procedure (MAP)
PMK 172/2023 sets technical rules for MAP, including the taxpayer’s choice between the domestic route and the MAP route for dispute resolution, with its technical details and impacts. This aligns with the Harmonization of Tax Regulations Law.
Advance Pricing Agreement (APA)
- Stricter eligibility. Previously only taxpayers under tax crime investigation were barred. PMK 172/2023 also bars taxpayers in a preliminary evidence examination, or in prosecution, trial or serving a tax-related criminal sentence. The preliminary examination bar raises questions about the presumption of innocence.
- Halted proceedings. If a taxpayer enters these legal processes during APA negotiation, the DGT may halt the APA.
- Multilateral APA and a second chance. Multilateral APAs are now explicitly possible. Taxpayers who withdraw a bilateral or multilateral request may apply for a unilateral APA instead.
- Longer renewal window. Taxpayers get more time to submit APA renewal requests.
- Penalty exemption. Penalties are waived when an agreed APA is applied to previously covered years and the rollback period, even if additional tax is payable.
Effective Date
PMK 172/2023 took effect on 29 December 2023 and repealed MoFR-22, MoFR-213 (transfer pricing documentation) and MoFR-49 (MAP). It is now the governing regulation for taxpayers and the DGT. The documentation requirements apply from fiscal year 2024.
Areas to keep an eye on
Broader definition of special relationships
PMK 172/2023 defines special relationships to include capital participation, family ties, and control through management or technology. This reflects modern business relationships and aligns with MoFR-22 and the explanation of Article 18 of the Income Tax Law.
Separate vs. combined transactions
Article 5 favours analysing each transaction separately under the arm’s length principle. Aggregation is allowed when transactions are significantly influenced by other related party transactions and individual analysis is not enough. This follows OECD TPG para. 3.9 and Article 11 of MoFR-22. The approach must reflect actual substance, not a one-size-fits-all aggregation.
Ex-ante approach to comparability analysis
Article 17 requires an ex-ante approach, in line with OECD TPG para. 3.69. Taxpayers set PKKU-compliant transfer prices using information reasonably available when the transactions begin (the “arm’s length price-setting” approach).
New transfer pricing methods
MoFR-22, reinforced by PMK 172/2023, introduced three methods: CUT, Asset Valuation and Business Valuation. They improve accuracy for specific financial criteria, tangible and intangible asset transactions, and complex business restructurings.
Two-step PKKU analysis
- Preliminary analysis. Support and economically justify specific intra-group transactions.
- Implementation of PKKU. Ensure intra-group transactions are comparable to those between independent parties.
Local file segmentation
A taxpayer with several business activities of distinct characteristics must segment its local file (LF) by business characterization, so the documentation reflects each business unit or activity.
Conclusion
PMK 172 Tahun 2023 is a positive change for taxpayers engaged in transfer pricing. It covers the full cycle, from industry analysis to VAT implications and possible repatriation, and it gives more clarity while encouraging fair and transparent transactions.
TaxPrime helps clients understand and implement these changes. Businesses should adapt proactively to stay compliant and use the opportunities PMK 172/2023 offers for more equitable business practices.
