TRANSFER PRICING AND TAXATION INTERNATIONAL

TRANSFER PRICING AND TAXATION INTERNATIONAL

1. Defines the basic concepts of international taxation

Indonesia as a sovereign state has the right to make provisions on taxation. Function of the tax was withdrawn by the government primarily to finance government activities in order to provide public goods and services needed by all people of Indonesia. In addition, the tax also serves to regulate the behavior of citizens of the State to do or not do something.
Indonesia is also part of the international world is definitely in the running wheels of government to international relations. International relations can be cooperation in defense security, cooperation in the social, economic, cultural and other, but the discussion is limited to the export and import (International Trade Transactions) related to international tax.

For that we need the international tax policy in terms of set the tax applicable in a country, assuming that each country could certainly have been set up in the tax provisions into its sovereign territory. But every country is free to regulate the taxation of the entity or a foreign national, international taxation is a form of international law, in which each state must submit to the international agreement known as the Vienna Convention.

Purpose of the International Tax Policy

Each policy would have a specific purpose to be achieved, as well as international tax policy also has the objective to be achieved, namely to promote trade between countries, pushing the pace of investment in each country, the government tried to minimize the taxes that inhibit trade and investment. One attempt to minimize the burden is by doing penghindaraan international double taxation.

The principles that must be understood in international taxation. Doernberg (1989) mention three elements that must be met netraliats in international taxation policy:

A. Capital Export Neutrality (Domestic Market Neutrality): Wherever we invest, the burden of taxes paid should be the same. So it makes no difference if we invest in domestic or foreign. So do not get when investing abroad, a greater tax burden because of the two countries bear the tax. This will underpin Income Tax Act Art 24 governing foreign tax credits.

2. Capital Import Neutrality (International Market Neutrality): investment from wherever derived, subject to the same tax. So that investors from both domestic or overseas will be subject to the same tax rate when investing in a country. It is the right of taxation of the same underlying denagn taxpayer of the Interior (WPDN) of the permanent establishment (PE) or Fixed Uasah Agency (BUT), which can be a branch of the company or service activities through the time-test of the regulations.

3. National Neutrality: Every country has the same tax on income. So if any foreign taxes that can not be deducted as an expense credited earnings deduction.

Taxation of cross border transactions

Double taxation occurs because the clash between the claims of taxation. This is because of the principle of global taxation for the taxpayer in the country (global principle) where the income of the foreign and domestic residents are taxed by the state (state taxpayer's domicile). In addition, there are territorial taxation (source principle) for foreign taxpayers (WPLN) by the state where the income source of income that comes from that country are taxed by the source country. This makes the income is taxed twice, first by country and by source country residents Example: PT A has a branch in Japan. Branch income is taxed in Japan by the Japanese tax authorities. And in Indonesia with a combined income is then multiplied by the domestic income tax rate of the domestic law of Indonesia.

2. Understand the concept of linkage with the tax return from abroad

One of the principles in the Income Tax Act is a substance over form; cost or selling price in every transaction there is a special relationship must be based on reasonable rates or prices that should be accepted (Article 10 Income Tax Act). Income taxes are calculated based on the multiplication rate of VAT to taxable income (PKP). Reduced taxable income derived from the deduction of income (Article 16 Income Tax Act).

In transactions between the taxpayer that is a special relationship, often items of income and deduction not necessarily the same proficiency level when compared to transactions conducted an independent party Atar, the impact of reporting income and deduction to calculate taxable income is not in accordance with the principles of fairness and the predominance of business. Therefore in accordance with the provisions of Article 18 paragraph (3) Income Tax Act, the Director General of Taxation has the right to adjust the amount of income and deduction which becomes the basis for calculating taxable income.
Core regulatory

PER 43/PJ-2010 a guideline for the taxpayer in the application of the principles of fairness and the prevalence of business, in order to reach a fair price and reasonable profit in the transaction between the parties that have links istimewa.Harga fair or reasonable profit, the pricing or profit in the transaction that there should be the same or related parties in certain price ranges when compared to similar transactions between independent parties.

The method of proportionality

There are five methods are applied in sequence, namely:

a) Comparable Uncontrolled Price Method (CUPM) commonly known as the CUP Method), suitable for comparing prices between transactions that have a special relationship with the independent parties in comparable conditions (identical goods and services).
b) Resale Price Method (RPM), to compare the transaction price minus gross natural product that reflects the functions, assets and risks in independent transactions (identical functions, although different goods and services).

c) Cost Plus Method (CPM) to compare the normal gross profit obtained by the company's gross profit would be similar to other companies that are comparable, at a Cost of Goods Sold in accordance with the Arm's Length Price (ALP). Transaction in the form of intermediate goods, transaction services, there are joint facilities or long-term agreement).
d) Profit Split Method (PSM) or a transactional profit method of determination by identifying the combined profit to be distributed to the parties affiliated with acceptable basic economics that provides a reasonable estimate of earnings when the transaction is independent (there is a unique form of goods not , and there are no appropriate comparators).
e) Transactional Net Margin Method (TNMM), a method which compares with operating earnings of profits, sales, assets, the percentage of net operating income is comparable if performed by an independent party. The fourth method is used when the above is not applicable).
The proportionality test includes:

A. Characteristics of goods or services traded both tangible goods (characteristic of quality, durability, availability, etc.), not the form of goods or services (transaction really occurred, geography etc.)

2. Function of each of the transacting parties (organization structure, the primary function of an organization, the type of assets used, risks, etc.)

3. Term of contract (the level of responsibility, risk, shared benefits, etc.)

4. Economic conditions (conditions that are relevant to the geographic location, competition,

market area, the level of supply and demand, and ketersediaaan items)

5. Business strategy (level of product innovation, product diversification, market penetration rate, etc).

Bookkeeping Process Analysis of proportionality

A. Taxpayers are required to record and document the steps of determining the principles of fairness and the predominance of business, the selection of comparators, the factors which influence the proportionality, as well as the analysis of proportionality, in accordance with Article 28 of UU KUP.

2. Document the information supporting the determination of the reasonableness of such principles, overview and organizational structure, business group structure, ownership structure, operasinal aspects of business, its competitors, and the corporate environment, price setting and cost alocation.

3. Transactions between the taxpayer with the parties that have a Related Party has a value of income or expenditure does not exceed Rp 10,000,000.00 (ten million rupiah) are not required to conduct proportionality analysis, determine the methods, analysis and documentation of proportionality, but the taxpayer still required comply with the provisions of Article 28 of Law KUP.

3. Understanding the reasons for a foreign tax credit

Crediting provisions of the Income Tax paid or payable in foreign countries
Under the terms of taxation, the taxpayer of the State tax payable on taxable income from all income received or obtained either from domestic or from abroad (World Wide Income). To avoid double taxation and provide the same taxation treatment of income received or accrued by the taxpayer of the State of foreign income received or accrued from Indonesia, then the tax paid or payable from the income derived from abroad may credited to the tax payable in the same tax year.

The incorporation of income from abroad is done as follows:

- For income from business done in the year earned income tax

- For income in the form of dividends, was conducted in the tax year when the acquisition of such dividends (SE-22/PJ.4/1995 Jo SE-35/PJ.4/1995)

- For other income, carried out in the receipt of such income tax year
- Losses incurred abroad should not be combined in calculating taxable income in Indonesia.
Income tax is creditable against income tax payable in Indonesia is a lesser amount of tax paid on overseas income by an amount calculated according to a specific comparison, namely: the amount of foreign income / Total income x number of PPh terhutang.Apabila amount of income from abroad came from several countries, the calculation of Income Tax Article 24 carried out for each country.

The crediting mechanism Tax Paid Abroad

(164/KMK.03/2002)

Income tax paid or payable in the State may be credited against income tax payable on income tax paid Indonesia.Pengkreditan Abroad (PPh Article 24) conducted in fiscal year income from abroad Combined with income in Indonesia.

Number of Income Tax Article 24 which can be credited to a maximum of a lower amount of income tax paid or payable in Foreign Countries and the number calculated by the ratio between income from abroad and the entire taxable income, or the maximum amount of income tax payable on all taxable tax in the country in terms of loss (income from LN is greater than the amount of taxable income).

4. Being sensitive to international tax planning within multinational corporations

In general, U.S. corporate taxes based on income at a rate of 35%, without considering the income derived from domestic or from abroad of its subsidiaries. Due to subsidiaries of U.S.

companies pay income tax on his country, the U.S. eliminate double taxation by allowing companies to US'nya tax credit against taxes paid abroad. Because tax rates vary widely between countries, U.S. foreign tax credit becomes more rumit.Sebagai example, a home-based computer company obtained $ 100 jt in the U.S. and $ 100 jt of the firm's subsidiary in Sweden. Under a pure worldwide system, the company is taxed in the U.S. 35jt% and imposed $ 35jt in Sweden. In order to prevent double taxation on income in Sweden, the U.S. foreign tax credits $ 28 jt paid to Sweden at a rate of 28%. Under the U.S. tax system, the company still owes taxes on $ 7jt residual income in Sweden. These numbers illustrate the difference between the amount to be paid to the mother country and the amount that was taxed at US.Terdapat limit the amount of tax credits that can be taken, the limit is comparable to U.S. rates.

The complexity of the U.S. system is the fact that the U.S. system does not impose a tax for income received from abroad until the company actually returning profits to the U.S.. Part of the U.S. international tax system is called "deferral" because the company can defer tax payments on overseas income for income re-invested enterprises in subsidiaries are active in foreign countries.

More detail, the U.S. has a system of "anti-defferal" which is also owned by another country, where taxes from state sources in one year earned U.S. parent company was not returned to their home countries. Complex rules are known as "Subpart F", as stated in U.S. tax law.

Complicated regulations

Not surprisingly, most economists and tax practitioners agreed that the U.S. International Tax System is not effective, complex, and provide a high cost. For example, according to the tax office on 1672 survey of large enterprises, it was found that there are high costs to meet the U.S. International Tax System, approximately 39% of the overall tax burden.

Taxation issues

The cost of not only the burden of taxation International tax law. Multinational companies are also trying to consider tax planning resources to minimize the tax burden. Contrary to what is believed to be the authors of the law on corporate behavior, the study illustrates how sensitive the economy of multinational corporations to tax rates and tax laws, and what to do with the company in order to minimize taxes.

Not only in U.S. companies that are sensitive to differences in tax rates abroad, but foreign investors are also sensitive to U.S. tax; main corporate tax rate (the body). The study found that tax rates have a significant influence on the location of the new plant. One is a study which revealed that high tax rates gives a negative effect on the establishment of new plants and plant expansions that have been established (meaning: the higher the tax rate, investment will be smaller), but the high tax rate would be positively correlated to the purchase of domestic firms by foreign companies.

Strategies to minimize taxes

There are several ways that multinationals taken to minimize the tax burden (tax worldwide). One method that has been developed known as "Transfer Pricing", which is the parent company where the price of commodities transferred to affiliated companies (products, components and trademarks) in foreign countries. Although very complex in practice, this technique is very simple goal is to allocate a greater burden on countries with high tax rates, with the goal of minimizing taxes, and allocating a large income in a country with lower tax rates.

5. Knowing the variables in the international transfer pricing

A. INITIAL CONCEPT

The complexity of the laws and rules that determine the tax for foreign companies and the profits generated abroad actually derived from some basic concepts
a. Tax neutrality is that the tax has no effect (or neutral) of the resource allocation decisions.
b. Tax equity is that taxpayers who are facing similar situations should pay similar taxes and the same thing but on disagreements between how to implement this concept.

2. PROFIT FROM THE SUMBAR taxation abroad,

Some States separti french, costal Rica, hongkong panama south africa, swiss and venezuala apply the principle of territorial taxation and impose taxes on companies that are domiciled in the country that profits generated outside the State. While most countries (including Australia, Brazil, China, Czech Republic, Germany, Japan, Mexico, Netherlands, UK, and Amarika States) to apply the principles throughout the world and impose taxes on profits or income of companies and citizens in it, regardless of the territory of the .

3. FOREIGN TAX CREDIT

The tax credit can be expected if the amount of foreign income tax paid is not too obvious (ie when the foreign subsidiary sent most profits come from overseas to the domestic parent company). Dividends are reported here in the parent company's tax return should be calculated gross (gross-up) to cover the amount of taxes (which are considered paid) plus all foreign levies taxes applicable. This means that as if the parent company receives dividends domestically which includes taxes payable kepeda foreign government and then pay the tax.

4. TAX PLANNING IN MULTINATIONAL COMPANIES

In the tax planning of multinational companies have certain advantages over a purely domestic firm because it has greater flexibility in determining the geographic location of production and distribution systems. This flexibility provides the opportunity to utilize their own national tax ataryuridis differences so as to lower the overall corporate tax burden.
The observation of these tax planning issues at the start with two basic things:
a. Tax considerations should never mengandalikan business strategy
b. Changes in tax laws are constantly limit the benefits of tax planning in the long term.

5. VARIABLES IN TRANSFER PRICING

Transfer prices set a monetary value on the exchange between firms that take place between the operating unit and is a substitute for market prices. In general, the transfer price is recorded as revenue by one unit and the unit cost by others. Cross-border transactions of multinational corporations are also open to a number of environmental influences that created the same time destroying the opportunity to increase profits through transfer pricing. A number of variables separti tax rate competition infalsi rates, currency values, limitations on the transfer of funds, political risk and the interests of joint venture partners are very complicated transfer pricing decisions.

6. Tax factor

Reasonable transaction price is the price to be received by parties not related to special items the same or similar in the exact same situation or similar. Reasonable method of determining the transaction price that is acceptable is:

(1) the method of determining the comparable uncontrolled price.

(2) method of determining the resale price.

(3) plus the cost price determination methods and

(4) other methods of assessment rates

6. Understanding the fundamental problems in the transfer pricing method

In the method of determining a fair price or a reasonable profit shall be conducted a study to determine the Transfer Pricing methods are most appropriate.
Transfer Pricing Methods that can be applied are:

A. method of price comparison between the independent (comparable uncontrolled price / CUP);
2. the resale price method (resale price method / RPM) or cost-plus method (cost plus method / CPM);

3. method of distribution of profit (profit split method / PSM) or the transactional net income method (transactional net margin method / TNMM).

In applying the Transfer Pricing methods must consider the following matters:
A. application of Transfer Pricing method performed in a hierarchical manner starting by applying the method of price comparison between the independent (comparable uncontrolled price / CUP) in accordance with appropriate conditions;

2. in terms of price comparison between the methods are independent (comparable uncontrolled price / CUP) is not appropriate to apply, must apply the method resale (resale price method / RPM) or cost-plus method (cost plus method / CPM) in accordance with the right conditions ;

Price Comparison method between the Independent Party (comparable uncontrolled price / CUP)
Method of price comparison between the independent (comparable uncontrolled price / CUP) is a method of Transfer Pricing is done by comparing the prices in transactions between parties who have Excellent prices in transactions between parties who do not have a Special Relationship in comparable conditions or circumstances.

Right conditions in applying the method of price comparison between the independent (comparable uncontrolled price / CUP) is:

1. traded goods or services have characteristics that are identical in comparable conditions, or
2. conditions of transactions between parties who have a Special Relationship with parties who do not have identical or Related Parties have a high degree of proportionality or accurate adjustments can be done to eliminate the influence of different conditions that arise.

 The resale price method (resale price method / RPM)

The resale price method (resale price method / RPM) is a method of Transfer Pricing is done by comparing the transaction price of a product is made between the parties that have a Special Relationship with the resale price of the product after deducting reasonable gross profit, which reflects the function , assets and risks, the resale of such products to others who do not have the Related Parties or the resale of products made in fair condition.
Right conditions in applying the method resell (resale price method / RPM) is:

1. a high degree of proportionality between the transaction between the taxpayer who has a Special Relationship with the transaction between the taxpayer has no Related Parties, in particular the level of proportionality based on the results of analytic functions, although the goods or services are bought and sold different; and

2. the seller's return (reseller) does not provide significant added value for goods or services sold.