Transfer Pricing Cases on Intangibles Performed by Manufacturing Industry Based on Tax Court Decisions 2015-2019 in Indonesia

This article aims to discuss transfer pricing disputes regarding the payments made on intangible assets by the Indonesian subsidiaries of MNEs operating as contract manufacturers. The underlying premise for assessing the manufacturing industry relates to its leading role in the Indonesian economy. In reality, most multinational contract manufacturers located in Indonesia perform only a limited function, assume only limited risk and are highly dependent on their principal with regard to business decisions. Payments on intangibles were the most prolific type of cases brought to the tax court in Indonesia during the fiscal years 2015-2019. Disputes typically arose from the technical aspect in a tax assessment concerning the payment made on intangibles to the principal, along with the interpretation of the tax regulation regarding the existence of the transaction and the existence of proof of the transaction. The Indonesian tax authority has created a procedure for auditing payment on intangibles; however, the current tax rule is considered inadequate. To improve the current tax audit, an assessment of the existence of value creation, which is the principal motor of business competitiveness, should be the main objective of the audit. A value creation audit might refer to the significant business function performed in Indonesia as part of an MNE’s global value chain.