A Local Transfer Pricing Documentation file (Local File) is more than a compliance attachment. It is the taxpayer’s contemporaneous evidence that related-party transactions reflect the arm’s-length principle, actual business conduct, and reliable financial data. For Indonesian taxpayers, the primary binding framework is Minister of Finance Regulation No. 172 year 2023 (PMK 172/2023). The principal international benchmark remains the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, supplemented by later OECD work where relevant, including Amount B for qualifying baseline marketing and distribution activities.

Regulatory Framework and Purpose

The OECD’s documentation model under BEPS Action 13 consists of a Master File, Local File, and Country-by-Country Report. The Local File focuses on the local entity and its material controlled transactions. It should demonstrate how the transaction was accurately delineated, why the selected transfer pricing method is the most appropriate, how comparables were selected, and how the tested result reconciles with the taxpayer’s accounts and corporate income tax return.

Indonesia adopted this three-tier structure and subsequently consolidated its transfer pricing, Mutual Agreement Procedure, and Advance Pricing Agreement rules through PMK 172/2023. OECD guidance is persuasive technical guidance, whereas Indonesian legislation determines the taxpayer’s domestic filing, language, timing, and evidentiary obligations. The two should therefore be read together without treating OECD guidance as a substitute for Indonesian law.

When Is a Local File Mandatory in Indonesia?

An Indonesian taxpayer conducting related-party transactions must prepare and retain a Master File and Local File when at least one prior-year threshold is met: gross turnover exceeds Rp50 billion; related-party transactions involving tangible goods exceed Rp20 billion; or each category of related-party services, interest payments, use of intangibles, or other transactions exceeds Rp5 billion. Documentation is also required when the related party is located in a country or jurisdiction whose income tax rate is lower than Indonesia’s applicable income tax rate, regardless of the transaction value.

A taxpayer that does not cross these documentation thresholds is not released from the arm’s-length principle. It must still be able to support the commercial rationale and pricing of its related-party transactions if questioned by the Directorate General of Taxes (DGT).

Minimum Information to Be Disclosed

Under PMK 172/2023, a Local File must at least describe the taxpayer’s identity and business activities; related-party and independent transactions; application of the arm’s-length principle; financial information; and material non-financial events or facts affecting prices or profitability. Where the taxpayer conducts more than one business activity with different functional characteristics, the Local File and financial analysis should be segmented accordingly.

In practical terms, the file should identify each counterparty, the nature and value of the transaction, contractual terms, invoices, payment flows, and relevant intercompany agreements. It should also explain the functions performed, assets used, and risks assumed by each party (the FAR analysis), identify the tested party, justify the selected transfer pricing method and profit level indicator, document the comparable-company search, and reconcile the tested financial results to the statutory accounts. Special transactions – including services, intangibles, loans and other financial transactions, asset transfers, business restructurings, and cost contribution arrangements – require the preliminary evidence specified in PMK 172/2023, such as actual benefit, economic rationale, legal and economic substance, and the parties’ capacity to assume and control risk.

Preparation and Delivery Timeline

The Master File and Local File must be prepared using data and information available when the related-party transaction occurs. They must be available no later than four months after the end of the tax year, supported by a signed statement confirming their availability date. A prescribed summary of the transfer pricing documentation must be attached to the annual corporate income tax return. The Local File must be prepared in Indonesian; a taxpayer permitted to keep books in a foreign language must also provide the required Indonesian translation. If the DGT requests the Master File or Local File for compliance supervision or an audit, the taxpayer must deliver it within one month after the request. This short response period makes year-round data collection and contemporaneous documentation essential.

Industry Analysis and Comparable Search Strategy

Industry analysis should connect external conditions to the tested transaction rather than merely repeat general market commentary. PMK 172/2023 requires consideration of the relevant product or service, market size and cycle, technology, supply and value chains, competitors, efficiency and location advantages, macroeconomic conditions such as inflation, economic growth, interest rates and exchange rates, and industry regulation. The analysis should explain how these factors affect pricing, risk allocation, or profitability and whether they create material differences between the tested transaction and potential comparables.

A defensible comparable search begins by considering reliable internal comparables. If external comparables are needed, the search universe should be defined by geography, industry codes, independence criteria, availability of financial statements, and relevant data years. Quantitative screens may then address turnover, persistent losses, related-party intensity, and incomplete data. Every surviving candidate should receive a qualitative review of its business description, products, functions, assets, risks, and extraordinary events. The database used, search date, search strings, screening sequence, rejection reasons, and final comparable set should be retained so another reviewer can reproduce the process. Comparable quality is more important than the number of companies in the final set.

Interquartile Range and Profit Level Indicators

PMK 172/2023 provides that an arm’s-length result may be a point or a range. Where two comparables produce different price or profitability indicators, the full range from minimum to maximum is used. Where three or more comparables produce different indicators, the arm’s-length range is the interquartile range from the first quartile (Q1) to the third quartile (Q3). If the taxpayer’s result falls outside the range, the adjustment should use the most appropriate point based on comparability; if such a point cannot be identified, the median is used. Statistical narrowing does not repair poor comparability, so unsuitable companies must be excluded before the range is calculated.

For the transactional net margin method, the selected profit level indicator (PLI) must fit the tested party’s value-creating activity and available accounting data. Common examples are operating margin (EBIT/sales) for a routine distributor, full-cost mark-up (EBIT/total costs) for a service provider or manufacturer, and a return on operating assets for an asset-intensive business. A Berry ratio (gross profit/operating expenses) may be appropriate only in limited circumstances where operating expenses reliably reflect the functions performed and the tested party does not contribute valuable intangibles or other significant functions. The numerator, denominator, accounting classification, tested segment, and treatment of pass-through costs should be applied consistently to the taxpayer and comparables.

Consequences of Non-Compliance

Failure to attach the required transfer pricing documentation summary may cause the corporate income tax return to be treated as incomplete and may trigger the administrative fine applicable to a corporate tax return, currently Rp1,000,000 under the General Provisions and Tax Procedures Law. A Local File delivered late, not delivered, or prepared without contemporaneous information may lose its status or evidentiary weight as transfer pricing documentation. The DGT may then perform its own arm’s-length analysis, make a transfer pricing adjustment, and issue an underpayment assessment. Any tax shortfall may carry statutory interest or other consequences calculated under the procedural rules applicable to the assessment. The precise sanction depends on the failure, legal basis, and assessment period and should be confirmed under the rules in force when the case arises.

Conclusion

An effective Local File is a coherent chain of proof: actual conduct, industry context, FAR analysis, method selection, comparable search, arm’s-length range, PLI calculation, financial segmentation, and tax-return reconciliation. Taxpayers should maintain this evidence throughout the year, complete the file within four months after year-end, and preserve a reproducible audit trail. This approach turns the Local File from a year-end formality into practical risk control for tax audits, controversy, MAP, and APA discussions.

Brief Historical Development

The OECD Transfer Pricing Guidelines were first approved in 1995. In 2015, BEPS Action 13 established the standardized three-tier documentation model of Master File, Local File, and Country-by-Country Report. Indonesia implemented this model through PMK 213/PMK.03/2016. The OECD issued its latest consolidated Transfer Pricing Guidelines in 2022, incorporating earlier work on transactional profit methods, hard-to-value intangibles, and financial transactions.

PMK 172/2023 revoked PMK 213/2016 and consolidated Indonesia’s arm’s-length, documentation, MAP, and APA framework. OECD publications on Amount B issued in 2024 and consolidated in 2025 supplement the 2022 Guidelines for qualifying baseline marketing and distribution activities; they do not replace the broader Local File analysis or Indonesia’s domestic documentation requirements.

Historical and Legal References

OECD (2022), OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022. Official source

OECD (2015), Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 – 2015 Final Report. Official source

Ministry of Finance of the Republic of Indonesia, PMK 172/2023 on the Application of the Arm’s-Length Principle in Related-Party Transactions. Official source

Directorate General of Taxes, official consolidated text of PMK 172/2023. Official source

Directorate General of Taxes, Applicable Provisions Regarding Transfer Pricing Procedures. Official source

OECD (2025), Consolidated Report on Amount B. Official source

Professional note: This article provides general information. A transaction-specific conclusion requires review of contracts, actual conduct, financial segmentation, and data available when the controlled transaction occurred.

 

Author: HSI Consulting Transfer Pricing Dept.