Page 7 - Working Paper (Multinational Firms Losses and Profit Shifting Behavior in Indonesia: Some Comments)
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DDTC Working Paper 1215

                      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
                                                                       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
                                                                       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
                         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:  (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.
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