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ax authorities see transfer pricing as a soft target with the potential to produce very large increases in tax revenue but also as a threat of tax evasion. Improperly treated, it would cause huge tax revenues losses.

Moreover, there is often disagreement regarding the exact transfer price of a transaction, thereby, leading to an appeal process in the tax court. Between 2009 and 2013, more than 45 percent of the cases the taxation directorate general lost in the tax court were related to alleged transfer pricing.

Take a transfer pricing case for service and intangible property transactions. The challenge often arises prior to the point of determining the fairness of the transfer price itself.

The first challenge is to prove the existence of the transactions. Tax auditors often make adjustments or disallowances on a substantial, or even the entire, amount of expenses regarding intragroup service transactions or royalty expenses related to transfer of intangible property.

Invoices of costs incurred, email correspondence, contracts and agreements are sometimes considered inadequate proof that the services were actually rendered or the intangible properties were truly transferred.

However, these adjustments or disallowances are usually turned aside by the court. The fact that the tax authority recognized the income tax payment based on article 23 or 26 of the Income Tax Law by the taxpayer in connection with those services or royalty expenses seems counterintuitive.

The tax authorities made adjustments or disallowances on deduction of service or royalty expenses, but still recognized taxes paid based on those expenses. Even though one can argue that the logic behind articles 23 or 26 is that all the contractual services and intangible properties are included as taxable objects, therefore, the tax due must be paid.

Yet, the expenses are not automatically deductible if they do not conform with the expenses to
earn, to collect and to secure the income.

Another case is when the court actually agrees with tax auditors'€™ argument that the expense is in connection to technology service and not of royalty expense on the transfer of intangible property of technology know-how.

The interesting part is that the court still has to cancel the adjustment made because the tax auditors have disallowed the entire expense deduction, instead of determining a fair transfer price.

The court argues that in a globalized business, intragroup transactions are naturally and most likely to happen, hence, an overall disallowance of expenses related to such transactions is unacceptable.

The burden of proof in Indonesia lies on the taxpayer as the consequence of the self assessment system. The taxpayer should provide sufficient transfer pricing documentation. An audit method of interview conducted thoroughly can really be a chance to comprehend the nature of a transaction, rather than relying solely on documentation.

Even with meticulous analysis, transfer pricing transactions are a source of dispute in a tax audit because such transactions are subject to assumptions. So rather than failing to capture or overlooking potential tax losses or even a potential tax evasion risk, the tax auditors tend to take the most conservative way by not recognizing the existence of services rendered or intangible property transferred, and, thus, disallow all related costs incurred.

It is explicable if the tax auditor finally shifts the weight of risk and dispute resolution to the tax court. Yet, this would not happen without consequences.

If the tax court granted the taxpayer appeal, an inevitable consequence is the interest compensation for the taxpayer which amounts to as much as 2 percent per month if the appeal resulted in overpaid tax as regulated in article 27A of Law No 28/2007 on taxation general provisions and procedures.

Taking the conservative way is quite reasonable because until October 2013, the tax authority had no technical and specific transfer pricing auditing guidelines, including on how tax auditors could prove the existence of intragroup service or intangible property transactions.

Auditing guidelines previously available regarding related parties referred to the guidelines used for auditing in general with some adjustments here and there. The guidelines ignored the fact that transfer pricing has its own characteristics and complexities.

In October 2013, the taxation directorate general issued regulation PER 22/PJ/2013 that stipulates auditing guidelines in regards to related parties.

This regulation offers guidelines that apparently are constructed to accommodate special matters on transfer pricing that haven'€™t been specifically identified in the previous regulation.

The regulaton even puts more details on specific transactions including intragroup services and intangible property.

Moreover, the directorate general issued directive SE-50/PJ/2013 which transforms the PER-22/PJ/2013 into more technical steps of auditing regarding related taxpayers.

Those regulations are expected to give more assurance for the tax auditor, and enhance audit quality on the auditing of transfer pricing.

 Yet, a detail regulation could be mistakenly assumed as a rigid regulation that restricts tax auditors in dealing with the dynamic of transfer pricing cases.

So it is interesting to see the audit and appeal results after those regulations are fully enforced. A proper documentation of transfer pricing audit and appeal results should also be taken.

Documentation will be inform of the effective winning factors on certain cases of transfer pricing.

It should be valuable to compare, to develop and to choose the most effective argumentation, assumption, and method to be applied to a certain transfer pricing case.