Page 7 - Working Paper (Multinational Firms Losses and Profit Shifting Behavior in Indonesia: Some Comments)

DDTC Working Paper 1215
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the willingness to profit shifting up to 72%. 34 in profit shifting activities. For instance, audit
priority for multinational firms that have
Although anti-avoidance rules tend to affiliation in tax haven countries.
lessen manipulation of transfer price, as well as • Building team capability with training,
changing capital structure into more a balanced recruitment expertise from various background,
one; these rules are difficult and not simple to or access to research materials, databases, and
implement, especially in developing countries case law. The effectiveness of anti-avoidance
that have weak tax administration system. rules, particularly transfer pricing rule, will
There should be a distinction between enacting depends on the capability of DGT.
rules in one hand, and having the capacity to
apply the rules on the other hand. 35
4.2. Transfer pricing rule
4. What Should We Do? The general consensus that transfer price
manipulation is dominant profit shifting
The fact that many of multinational firms strategy may be relevant in Indonesian case.
in Indonesia suffered losses should not be Firstly, majority of technology and knowledge is
immediately associated with profit shifting held by multinational enterprise in developed
strategies. There are numerous other factors countries, whereas research and development
that may bring financial distress. However, profit activities in Indonesia (or developing countries)
shifting is not a myth. Therefore, the Government are rarely found. From this perspective, transfer
of Indonesia, particularly DGT needs to be careful and lease of intangibles and technical services
when dealing with such issues. to affiliations in Indonesia are very intense and
open opportunities to manipulate the ‘price’ and
4.1. Tax administration improvement
substance of the transactions. Secondly, ALP –as
the main principle to assessed transfer pricing-
This part is centralized on single solution
is very hard to apply in practice, especially with
which is: tax administration improvement. First
the low capacity of tax administration. Further,
of all in order to assess loss-making companies,
DGT’s auditor should understand the business ALP also assumed that open market provides
comparables for any controlled transaction,
framework of a multinational enterprise.
which is not true especially in Indonesia. Thus,
Most of transfer price manipulation and debt
domination of transfer price manipulation
shifting cases are hidden under commercial
(non-financial technique) is understandable
motives. It is important to bear in mind that
because it is ‘safer’ and easier to employ.
financial loss could be driven by tax and non-
tax motives.
In general, Indonesia has adequate transfer
pricing rule but still not very effective to combat
Furthermore, in order to achieve such
37
transfer price manipulation. Aside from
improvement, there are other factors that need
to be considered: 36 the DGT’s capability to enforce the rule; the
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problem might be centralized in the ALP itself.
• Assessment of current capabilities and areas With regards to this problem, today, there is
that need further improvements. An assessment intense discussion on the Base Erosion and
is not limited to review the level of education Profit Shifting (BEPS) Action Plan , particularly
39
and expertise of human resource, the legal on Action 8, 9, 10 and 13, that is trying to revise
environment, or network of bilateral tax the fundamental aspects of OECD Transfer
treaties, but also includes the availability of Pricing Guidelines. Indonesia should consider
information technology system to enforce the relevance of BEPS project and other OECD
compliance. works on transfer pricing for its transfer pricing
• Risk-based approach to audit compliance. Tax policy. Why? There are at least three arguments
authorities should have a targeted approach to support this view.
to audit, i.e. predetermined criteria to identify • Since 2012 OECD initiated the project of
transactions that are highly potential involved

34. See B. Bawono Kristiaji, “The Incentives and Disincentives of 37. See detail of Indonesian transfer pricing rule in Freddy Karyadi
Profit Shifting Strategies in Developing Countries” (Master Thesis, and Darussalam, “Indonesia-Transfer Pricing,” IBFD Topical Analyses,
Tilburg University, 2015). Available online at: https://arno.uvt.nl/show. (March, 2014).
cgi?fid=137341. 38. The limitation of arm’s length principle has been discussed by various
35. Carmel Peters, “Developing Countries’ Reactions to the G-20/OECD scholars. For instance, see David L. P. Francescucci, “The Arm’s Length
Action Plan on Base Erosion and Profit Shifting,” Bulletin of International Principle and Group Dynamics – Part 1: The Conceptual Shortcomings,”
Taxation, Vol. 69, No. 6/7 (2015). International Transfer Pricing Journal, Vol. 11, No. 2 (2004): 55-75.
36. See UN, United Nations Practical Manual on Transfer Pricing for 39. OECD, Action Plan on Base Erosion and Profit Shifting (Paris: OECD
Developing Countries, (New York: UN, 2013), 83 – 111. Publishing, 2013), 17 – 23.