How to Manage Transfer Pricing Risks during Pandemic

How to Manage Transfer Pricing Risks during Pandemic

During the ongoing COVID-19 pandemic, there are so many problems faced by taxpayers and tax authorities. DDTC Senior Partner, Danny Septriadi said that the problem which often faced in preparing transfer pricing during this pandemic is how to find and determine comparables in the tax year of 2020 for which data is not yet available.

He also added that companies are currently trying to keep cash flow safe. On the other hand, the Indonesian government has demanded to maintain tax revenues to support the handling of this pandemic.

Therefore, to avoid tax disputes, taxpayers are expected to be able to explain their transfer pricing documentation, in accordance with domestic and international regulations. And how can the tax authorities be able to understand the conditions during this pandemic which affected the business activities of Indonesian companies and other countries.

In the Webinar organized by DDTC, entitled “Handling Transfer Pricing Audit in the Midst of Pandemic”, Speaker Yusuf Wangko Ngantung, Associate Partner of International Tax & Transfer Pricing Dispute Services of DDTC, explained several things about transfer pricing risks in the midst of pandemic, transfer pricing adjustments that can be considered during the pandemic and the specific transactions carried out during the pandemic.

Transfer Pricing Risks in the Midst of Pandemic

In this pandemic era, there is a lockdown and limitations on businesses that cannot carry out their activities. This all leads to a decline in margins and company performance especially on businesses that depend on foreign supply chains. Although in this pandemic era, there is a large decline in profits in companies, the Arm's Length Principle must still be applied.

During the preparation of the Transfer Pricing Documentation for the tax year of 2020, we might have met some difficulties in collecting comparable data. The requirements for the preparation of a Transfer Pricing Documentation must use the data available when the transaction was made or as we all know, the ex-ante data.

But due to pandemic, the data we need is not yet available. Therefore, the only data which are available for now are the data of the year of 2019 and the years before. However, if those previous years’ data are applied in the Transfer Pricing Documentation of tax year of 2020, it will certainly cause issues, since in 2020, the company has experienced a decline in profits while the comparable data in 2019 and the years before have not been affected by the effects of the pandemic.

The issue that is likely to happen is that the operating profit will be below the Arm’s Length range and as the result, tax authorities will certainly make corrections on the documentation.

Please note that the availability of comparable data for the tax year of 2020 is experiencing delays, which it might be available later in 2021.

OECD's suggestion

The OECD realizes that in 2020, many companies experience a lack of comparative data information because there is no comparable that reflects the situation during the pandemic or the unavailability of comparable data due to delays in publishing the data.

In Indonesia, the Transfer Pricing documentation is done by conducting an ex-ante approach where it must use the data available when the transaction is made. Meanwhile, the OECD suggests that it is possible to conduct an ex-post approach, which is to use data after the transaction is made, but that goes back to the domestic regulations of each country.

Ways of how to manage transfer pricing risks during the pandemic that can be considered

  1. Adjustment to our own company's income statement

We compare the company's planned income statement when the pandemic has not yet hit with the actual income statement at the end of the year when the pandemic has hit. The comparison definitely shows a decrease in profit due to not achieving the targets that have been planned by the company.

We need to know that there are external factors that cause a decrease in profits during this pandemic. This external factors is related outside the associated transactions. For example, there is a decrease in revenue but not accompanied by a decrease in fixed costs which means, whether there are more or less sales, the rent payment is still there. These things can indicate that the cause of the decline in profits was caused by external factors other than related transactions.

There is a special factor adjustment in which the actual income statement has been adjusted with the external factors. So that in the end, the adjusted profit will definitely get an increase in profit where it can be compared with the comparable. Please be advised that, this income statement should be accompanied by relevant evidence during the examination.

  1. Adjustment to the comparable data

What we can do is whether we have to revise the search criteria, to think that is it possible to use data in 2008 which was a financial crisis year. Although usually in normal practice, the comparable data that suffered losses are rejected in the transfer pricing analysis, especially those who experienced losses for 3 consecutive years.

We also can make adjustments to the geographical location of the comparable since comparable data located in Indonesia is rarely available.

Another thing is, we can use full range instead of interquartile range. We can use interquartile if there are more than three (3) comparables, if there are only two (2) comparables then we can use full range. Such adjustment is less flexible.

So, which adjustment is better to be used in Indonesia?

Adjustments to the income statement of our own company is suitable to use in Indonesia since it has been recognized by the Tax Court and even the Supreme Court. The OECD also said that if the company is experiencing a loss, the company will be given the opportunity to provide an explanation through a special factor adjustment.

Whereas, if we adjust our comparable data, there will be a risk that the data to be adjusted is not available.

Please note that, if the Transfer Pricing Report is carried out with the usual treatment without consider using the adjustments above, the risk that will arise can cause the report to be reviewed as not according to Arm’s Length Principle.

Specific Transactions during the Pandemic

There are new issues related to intragroup transactions during this pandemic which consist of:

  1. Intragroup Financing

During this pandemic, there is a need to maintain cash flow and some companies need additional funding. But are the third parties willing to lend? So, before we talk about the interest rate, does the company deserve the loan? Eligibility is usually tested with a certain credit rating, if it is feasible, a reasonable interest rate will be discussed. If it is not feasible, there will be a risk where the loan can be characterized as capital.

  1. Intragroup Service

Intragroup service is one of the transactions that often occur in Indonesia, especially among members of multinational groups because of the additional risk associated with Permanent Establishment, in the form of where some foreign employees are present in Indonesia for several days and cannot return to their home countries.

Intragroup service is calculated from a time test where the foreign employees are physically present in Indonesia can be determined, whether the employee is on vacation or working, the time test is still calculated.

The OECD recommends that in calculating the time test, the lock down period will not be taken into account.

Regarding the preparation of transfer pricing analysis, it is necessary to know whether intragroup services provide benefits when your profits are down.

  1. Royalties

Royalties can be in the form of brands. This needs to be considered because it is often argued by the tax authorities that those who perform the important functions are Indonesian companies. The important functions which Indonesian companies mostly perform are the marketing and distribution functions under foreign brands. And if it is true that the companies in Indonesia perform those functions, the economic owner of foreign brands might be located in Indonesia.

  1. Business Restructuring

Business restructuring is also an important consideration during this pandemic. There are companies that change their business characteristics from fully fledged manufacturing/distributor to contract or limited risk distributor after reducing their functions, assets and risks.

When there is a transfer of functions, assets and risks from Indonesia to other countries, this can be considered as a related transaction and this requires compensation in the form of a potential profit transfer. This is also an issue during the pandemic because many businesses are restructuring and are not paid attention by taxpayers hence a correction in the Taxpayer's Transfer Pricing Documentation. Please note that, this is included in the intangible category, because the transfer of functions, assets and risks is not visible.


Transfer Pricing Documentation is our basis during the examination, accompanied by evidence in the form of relevant data and information. During this pandemic, knowing the facts and conditions of the company is very important, especially those who experience profit losses. After knowing these facts and conditions, accurate adjustments can be made in order to compare taxpayers’ income statement with the comparable data in 2019 and years before. Accurate adjustments can be described using economically relevant characteristics during this pandemic, namely contract terms, functional analysis, product or service characteristics, economic conditions and business strategies.



Direktorat Jendral Pajak bkpm

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