Chase Transfer Pricing Abuses Through GAAR

The practice of abusing the fairness determination of transaction prices to related parties (transfer pricing) is becoming more and more common. This is not only related to the criteria for the special relationship, but also to the transaction model and scheme. The goal is to avoid tax (tax avoidance). This is one of the factors causing the non-optimal tax revenue. Then, does the Directorate General of Taxes not yet have a strategy to counter this practice?

The relationship criteria are due to ownership/investment, management, or family relationships. Article 18 paragraph (4) of the Income Tax Law (UU PPh) states, a special relationship is considered to exist if: (a) the taxpayer has direct or indirect equity participation of at least 25% in other taxpayers, the relationship between the taxpayer and the investment at least 25% for two or more taxpayers, or the relationship between two or more taxpayers, the latter; (b) the taxpayer controls another taxpayer or two or more taxpayers are under the same control either directly or indirectly; (c) there is a family relationship either by blood or by marriage in a straight line and/or one degree to the side.

Until now, Indonesia has set a way to prevent this practice in the form of Special Anti Avoidance Rules (SAAR). SAAR itself is a special anti-tax avoidance provision. The Income Tax Law itself has regulated it.

First, deferment of dividend payment or controlled foreign corporation (CFC). As stated in Article 18 paragraph (2) of the Income Tax Law, the Minister of Finance has the authority to determine when a domestic taxpayer receives dividends for capital participation in a foreign business entity other than a business entity that sells its shares on the stock exchange, provided that: (a) the amount of capital investment the domestic taxpayer is at least 50% of the total paid-up shares; or (b) together with other domestic taxpayers have an equity participation of at least 50% of the total paid-up shares.

Second, limiting interest charges or thin capitalization. The Director General of Taxes is authorized to re-determine the amount of income and deductions as well as determine debt as capital to calculate the amount of Taxable Income for taxpayers who have special relationships with other taxpayers in accordance with fairness and business habits that are not affected by special relationships by using the price comparison method. between independent parties, the resale price method, the cost-plus method, or other methods. This is as stated in Article 18 paragraph (3) of the Income Tax Law.

Third, implementation of advance pricing agreement (APA). The Director General of Taxes is authorized to enter into agreements with taxpayers and cooperate with tax authorities of other countries to determine the price of transactions between parties having a special relationship, which is valid for a certain period and supervises its implementation as well as renegotiating after the certain period ends.

Fourth, the use of special purpose companies in tax haven countries. Article 18 paragraph (3b) and (3c) of the Income Tax Law regulates this matter. A taxpayer who purchases shares or assets of a company through another party or an entity formed for such a purpose (special purpose company), can be determined as the party who actually makes the purchase as long as the taxpayer concerned has a special relationship with the other party or entity and there are irregularities. pricing.

Furthermore, the sale or transfer of shares of an intermediate company (conduit company or special purpose company) established or domiciled in a tax haven country that has a special relationship with an entity established or domiciled in Indonesia or a permanent establishment in Indonesia may be determined as a sale or transfer of shares of an entity established or domiciled in Indonesia or a permanent establishment in Indonesia.

Fifth, re-determination of income of WP OP who has ties to companies abroad. Article 18 paragraph (3d) of the Income Tax Law outlines that the amount of income earned by domestic individual taxpayers from employers who have special relationships with other companies that are not established and not domiciled in Indonesia can be re-determined, in the event that the employer transfers all or part of the income of the domestic individual taxpayer in the form of fees or other expenses paid to the company which is not established and is not domiciled in Indonesia.

However, the growing criteria, models, and transactions for tax avoidance make transfer pricing abuse difficult to detect. Therefore, government policies are needed to anticipate this.

First, further provisions are needed regarding the criteria for special relationships that have been in the Income Tax Law. Second, the Director General of Taxes is given the authority to make stipulations on transactions aimed at reducing, avoiding, and/or delaying tax payments that are contrary to the intent and purpose of taxation provisions.

This authority is the adoption of the General Anti Avoidance Rules (GAAR). From various literatures, GAAR itself is a general anti-tax avoidance provision that is not limited to certain subjects or objects. GAAR will target schemes that involve a transaction that would normally not be carried out, other than for reasons of tax benefits for taxpayers.

As stated by Darussalam and Kristiaji (2017), GAAR stands on the allegation that tax evasion is carried out on transactions or a scheme that has no business substance. For this reason, GAAR authorizes the tax authorities to cancel or correct a transaction for tax purposes if the transaction does not have economic substance or is carried out solely for tax benefit

That way, the government can take action or define another SAAR that can be used to detect tax evasion transactions. In the end, the Directorate General of Taxes can be more flexible and adaptive to counter increasingly sophisticated tax avoidance models. In addition, for taxpayers, this will further encourage confidence, legal certainty, and justice.

Source https://pajak.go.id/id/article/kejar-penalahguna-transfer-pricing-via-gaar

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