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simplification measures in transfer pricing. formula.42 Secondly, fixed debt to equity ratio
The project stands on the position that the approach provides great deal of certainty and
application of arm’s length principle should not simple to implement.43 Moreover, the impacts
increase compliance cost and administrative of this policy to firms’ capital structure are
burden for the taxpayers. Any thresholds for relatively promising, at least it can ensure
40
eligible taxpayers to submit documentation towards more balance between debt and equity,
or safe-harbor measures (reference value that and therefore creates less macroeconomic
can be considered as arm’s length value) are risk (for instance: current account deficit
now acceptable and will be included on the or volatility of exchange rate). Thirdly, this
revised version of the OECD Transfer Pricing reference point may not necessarily represent
Guidelines. market reality.44 This was supported by the fact
• More focus on value creation as stated in that in principle, fixed debt to equity ratio does
Action 8, 9, and 10 of BEPS. As a consequence, not contemplate any circumstances of company,
functional analysis and value chain analysis e.g., industry sector, development phase of
will play more important rule to allocate the firms, and others.45 On the other hand, another
profit. Again, value chain analysis is a tool to approach such arm’s length capital structure,
examine the contribution (value creation) of offers more comprehensive approach on how to
the entity within the multinational enterprise. assess excessive debt especially on dealing with
Value creation also relates to the origin intercompany loan.46
principle, where the substantial of economic-
producing activity is take place, and ensure At the end, the combination between fixed
fairer share of profit across country. debt to equity ratio and arm’s length test is
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• Lastly, country by country reporting (CbCR). considerably the best solution, since both
of them can cover each other’s weakness.
As emphasized on previous section, separate Combination in here refers to the flexibility for
accounting approach (ALP) offers opportunity taxpayers to choose which approach is more
for the taxpayers to hide their income. In suitable for them.
Action 13 of BEPS, OECD/G-20 promotes the
modification of transfer pricing documentation
into country-by-country reporting. The 5. Conclusion
idea is to have transparency and allow tax
administration in other jurisdiction to access For Indonesia, tax revenue is a vital source to
financial information of their taxpayer’s related finance its development. Moreover, profit shifting
party. problem is particularly important because the
share of income tax revenue from corporation is
As a conclusion, the flexibility of the ‘new’
large.
arm’s length and alignments to value creation
under OECD BEPS will provide great benefits As with the case of independent firms,
for Indonesia. multinational firms could also sustain genuine
4.3. Thin capitalization rule losses whether caused by extraordinary market
condition, business cycle, their function and risk,
or driven by non-economic factors. However, when
Although not a dominant profit shifting
independent firms that are involved in the same
strategy, debt shifting could also erode tax
business activities are not tolerable with such
base through interest expense. Up to now,
continued losses; then there will be an indication
Indonesia does not have thin capitalization rule
that multinational firms has intentionally created
to tackle such problem. In the authors’ opinion,
Indonesia should use the combination of fixed
debt to equity ratio with the arm’s length test. 42. See Jennifer Blouin, et al., “Thin capitalization Rules and Multinational
Firm Capital Structure,” CEPR Discussion Paper, No. 9830 (2014).
There are two main considerations to support
43. OECD, “Thin Capitalization Legislation: A Background Paper for
this view:.
Country Tax Administrations”, Tax and Development – Draft, (2012), 12.
44. Roberta Augusta Assad Dib, “The New Brazilian Thin Capitalization
Firstly, as proved on empirical study by
Rules and How the Other BRICs Approach the Subject,” Bulletin for
Blouin et al., the thin capitalization rules International Taxation, Vol. 64, No. 6 (2010): 340.
were more effective if referred to automatic 45. Detlev J. Piltz, “General Report, Subject II: ’International Aspects of
Thin Capitalization’”, Cashier de droit fiscal international, Vol. LXXXIb
(The Hague: Kluwer Law International, 1996), 91.
46. Detlev J. Piltz, “General Report, Subject II: ’International Aspects of
40. The idea also supported by various tax stakeholders. See Michael C. Thin Capitalization’”, Cashier de droit fiscal international, Vol. LXXXIb
Durst, “Pragmatic Transfer Pricing for Developing Countries,” Tax Notes (The Hague: Kluwer Law International, 1996),125. However, application
International, Vol. 65, No. 4 (2012): 249. of arm’s length principle to limit intra-group excessive debt applies if and
41. See Eric C.C.M. Kemmeren, Principle of Origin in Tax Conventions: only if intercompany transactions existed. This rule seemed to neglect
A Rethinking of Models (Dongen: Mr. Eric C.C.M. Kemmeren/Pijnenburg the facts that ‘back to back loan’ or independent loans with guarantee
vormgevers, 2001). (collateral) are quite popular nowadays.