Transfer Pricing Strategy: Lawful in Principle, Controversial in Practice

Written by: Mavella Alyshia Clairene Kusuma & Chelsea Ruth Togatorop

Publication Date: 5th July 2025

Transfer pricing is quite simply an explanation of how multinational companies calculate the prices of intra-group transactions of their associated firms. Transfer pricing is very susceptible to manipulation even though it is partly legal and an essential instrument adopted by multinational firms to manage intra-group transactions. Multinationals are able to reallocate intra group transfer prices in order to divert profits to lower-tax nations, reducing their total tax liabilities. As in the majority of other countries, Indonesian tax authorities have placed more importance on enforcement of transfer pricing.

The Arm's Length Principle

The "arm's length principle," supported by the Organization for Economic Co-operation and Development (OECD) in its Transfer Pricing Guidelines, is the basis of proper transfer pricing practice. According to this theory, related-party transactions ought to be priced in a way similar to what would be exchanged between independent firms under similar conditions. This principle is developed and legislated for Indonesian law by way of Minister of Finance regulations (Peraturan Menteri Keuangan, or PMK). The purpose of these rules is to make sure that taxpayers are complying with the arm's length principle and to give tax administrations guidelines on whether transfer pricing policies are appropriate.

Growing Importance in Tax Audits

Director of the Directorate General of Taxes' Directorate of Audit and Collection Sub-Directorate for Special Transaction Audits Affan Nuruliman has emphasized the growing importance of transfer pricing in tax audit business in Indonesia and internationally. He observes that auditors are more concerned with the high-level complexities of transfer pricing than with the older issues like undeclared sales. This change is due to changing trends in the behavior of taxpayers. One of the main reasons for the indirect pursuit of tax avoidance by transfer pricing activities which are against the arm's length principle is the rise in intragroup transactions, both domestic and cross-border.

Statistical Evidence

According to DJP data, the amount of intercompany transactions rose sharply from Rp 6,248 trillion in 2021 to Rp 10,360 trillion in 2022. Thus, tax audits with transfer pricing analyses reached over Rp 6 trillion. Moreover, from 187 in 2022 to 450 in 2023, requests for comparable data from tax auditors rose sharply. This increased focus on transfer pricing forcefully demonstrates the challenge of transposing a seemingly simple theory into reality's complex realities of global business activities.

The underlying problem is the realization of the arm's length principle in the complex reality of international business transactions, as follows from the necessity of comparable data and dramatic development of audit procedures. For the sake of equity and tax compliance in these days of globalization, it is therefore more crucial than ever to effectively enforce and monitor transfer pricing laws.

References

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Beuselinck, C., & Pierk, J. (2024). On the dynamics between local and international tax planning in multinational corporations. Review of Accounting Studies, 29(1), 852-888.

Wittendorff, J. (2010). Transfer pricing and the arm's length principle in international tax law

Irish, C. R. (1986). Transfer pricing abuses and less developed countries. U. Miami Inter-Am. L. Rev., 18, 83.

Eden, L. (2012). Transfer price manipulation. Draining development, 205-234.