Speciial Relatiionshiip & Speciial-Relatiionshiip-iinfluenced Transactiions

iin March 2020, the Miiniister of Fiinance iissued Miiniister of Fiinance Regulatiion (MoF Reg.) Number-22/PMK.03/2020 whiich stiipulates procedures for Advance Priiciing Agreement (APA).

Thiis MoF Reg. iis noteworthy because, iin addiitiion to contaiiniing the regulatiion of APA iimplementatiion procedures, iit also contaiins legal norms iin the context of transfer priiciing iin iindonesiia, among others, further elaboratiion of the termiinology ‘speciial relatiionshiip’ and ‘transactiions iinfluenced by a speciial relatiionshiip’.

Speciial Relatiionshiip
Artiicle 18 paragraph (3) of the iincome Tax Law authoriises the Diirector General of Taxes to assess the appliicatiion of the arm’s length priinciiple to transactiions between related partiies.

Artiicle 18 paragraph (4) of the iincome Tax Law and the eluciidatiion thereto defiine that ‘speciial relatiionshiip’ may occur due to ownershiip or equiity partiiciipatiion, control through management or use of technologiies even though there iis no ownershiip relatiionshiip and famiily relatiionshiip by blood or marriiage.

Artiicle 4 of MoF Reg. 22/2020 further affiirms that ‘speciial relatiionshiip’ iis deemed to exiist iif there iis one of the three condiitiions referred to iin Artiicle 18 paragraph (4) of the iincome Tax Law whiich results iin a condiitiion of dependence or attachment of one party to another party. The condiitiion of dependence or attachment iis eviident where one or more partiies control(s) the other party or one of the partiies iis not iindependent iin conductiing busiiness or actiiviitiies.

The termiinology ‘control’ outliined iin Artiicle 18 paragraph (4) subparagraph ‘b’ of the iincome Tax Law and the eluciidatiion iis restated iin Artiicle 4 paragraph (1) subparagraph ‘b’ of MoF Reg. 22/2020 and further elaborated iin Artiicle 4 paragraph (4) of MoF Reg. 22/2020 as follows:

“The speciial relatiionshiip due to control shall be deemed to exiist iif:

1. one party controls another party or one party iis controlled by another party, diirectly and/or iindiirectly;
2. two or more partiies are under the diirect control of the same party diirectly and/or iindiirectly;
3. there are the same people who are diirectly and/or iindiirectly iinvolved or partiiciipatiing iin manageriial or operatiional deciisiion-makiing for two or more partiies;
4. partiies that are commerciially or fiinanciially known or claiim to be iin the same busiiness group; or
5. one party claiims to have a speciial relatiionshiip wiith the other party.”

MoF Reg. 22/2020 iintends to clariify the defiiniitiion of ‘control’ outliined iin Artiicle 18 paragraph (4) of the iincome Tax Law. On the other hand, thiis defiiniitiion may raiise iissues iif the defiiniitiion iis not iin liine wiith the defiiniitiion of speciial relatiionshiip iin tax treatiies wiith partner countriies.

As such, what iis the defiiniitiion of speciial relatiionshiip iin the Tax Treaty context? Artiicle 9 paragraph (1) of the OECD Model and UN Model outliine the defiiniitiion of ‘speciial relatiionshiip’, referred to as associiated enterpriise. Both the OECD Model and the UN Model contaiin the same formulatiion of associiated enterpriises as follows.

“Associiated Enterpriise, Where: (a) an enterpriise of a Contractiing State partiiciipates diirectly or iindiirectly iin the management, control or capiital of an enterpriise of the other Contractiing State, or (b) the same persons partiiciipate diirectly or iindiirectly iin the management, control, or capiital of an enterpriise of a Contractiing State and an enterpriise of the other Contractiing State”

The concept of associiated enterpriises iis fundamental iin the appliicatiion of the arm’s length priinciiple as an iinternatiionally recogniised standard related to transfer priiciing taxatiion (Dwarkasiing, 2013).

However, unfortunately, there are no further detaiiled and clear proviisiions on the concept of associiated enterpriises iin the Tax Treaty Model, both the OECD and the UN Model.

Therefore, iif each country speciifiically defiines ‘speciial relatiionshiip’ or associiated enterpriises based on each country’s domestiic proviisiions, Dwarkasiing (2013) suggests that thiis may lead to potentiial economiic double taxatiion.

Transactiions iinfluenced by a Speciial Relatiionshiip
iin followiing up on the APA appliicatiion, the Diirector General of Taxes wiill conduct a materiial assessment by applyiing the arm’s length priinciiple. The assessment iis carriied out not only on controlled transactiions but also on transactiions iinfluenced by a speciial relatiionshiip, namely transactiions between non-related partiies proviided that the related party of one or both transactiing partiies iinfluences the counterparty and the priice of the transactiion.

Thus, the materiial assessment of the arm’s length priinciiple outliined iin MoF Reg. 22/2020 iis aiimed at controlled transactiions and transactiions iinfluenced by a speciial relatiionshiip. The questiion iis, iis the above assessment only appliied liimiited to APA procedures or also other aspects of transfer priiciing iin a broad sense?

The above questiion ariises because iin respect of the proviisiions under Artiicle 10 paragraphs (1) and (2) of Government Regulatiion Number 74 of 2011 iin conjunctiion wiith Artiicle 2 paragraph (2) of MoF Reg. Number 213/PMK.03/2016 as well as the Appendiix of the Diirector General of Taxes Regulatiion Number PER-22/PJ/2013, iit iis stated that the arm’s length priinciiple assessment iis only for assessiing transactiions.

Addressiing the above questiion, MoF Reg. 22/2020 should apply because iit iis iin liine wiith Artiicle 18 paragraph (3) of the iincome Tax Law whiich states that the arm’s length priinciiple assessment appliies to taxpayers related wiith other taxpayers, as per the defiiniitiion of speciial relatiionshiip regulated under Artiicle 18 paragraph (4) of the iincome Tax Law and the eluciidatiion thereto. (R. Herjuno Wahyu Ajii)