Asia Transfer Pricing Brief: Q1 2024

April 26, 2024 Posted by China Briefing Written by Sophie Wang and Qian Zhou Reading Time: 8 minutes

In our Asia Transfer Pricing Brief for Q1 2024, we highlight the latest transfer pricing developments across Asian markets. Among others, Indonesia has released updated transfer pricing guidelines, providing clarity and guidance for businesses operating in the country. Singapore is set to apply the global minimum tax rate of 15 percent for large multinational enterprises (MNEs) and impose domestic top‑up tax starting on or after January 1, 2025. Hong Kong also aims to achieve alignment with global minimum tax standards by implementing similar measures starting from 2025.

Indonesia released updated transfer pricing guidelines

Indonesia’s Ministry of Finance (MoF) has released Regulation No. 172 of 2023 (“PMK-172”), which prevails as a unified transfer pricing guideline. PMK-172 consolidates various transfer pricing matters that were previously covered under separate regulations, including the application of the arm’s length principle, transfer pricing documentation requirements, transfer pricing adjustments, Mutual Agreement Procedure (“MAP”), and Advance Pricing Agreements (“APA”).

Key Highlights Introduced in PMK-172
Application of arm’s length principle	Expansion of scope: · PMK-172 broadens the scope of transactions subject to the arm’s length principle. · It clarifies the definition of “control” within the context of establishing a “special relationship.” This definition encompasses both direct and indirect control, shared control through management or technology, the presence of common decision-makers, and commercial and/or financial affiliations. · The arm’s length principle now applies not only to transactions between related parties but also to transactions involving parties without a “special relationship” where the related party of one or both of the parties determines the counterparty and the transaction price.
Reinforcement of Ex-Ante Principle: · The ex-ante principle emphasizes that taxpayers should establish their transfer pricing policies before entering into related-party transactions. · PMK-172 reinforces this principle, encouraging taxpayers to proactively assess and document their transfer pricing arrangements.
Additional guidance on transfer pricing methods and comparability analysis: · PMK-172 provides detailed guidance on various transfer pricing methods (e.g., comparable uncontrolled price, resale price, cost plus, etc.). · It also emphasizes the importance of conducting a thorough comparability analysis to select the most appropriate method for a given transaction.
Preliminary substance-check: · Before applying the arm’s length principle, PMK-172 introduces a preliminary stage where taxpayers assess the substance of their related-party transactions. · This substance-check ensures that the economic substance of the transaction aligns with its legal form.
Secondary Adjustment of Deemed Dividend and VAT	· PMK-172 addresses secondary adjustments related to deemed dividends and Value Added Taxes (VAT). · When a primary transfer pricing adjustment is made (e.g., increasing the price of a related-party transaction), a corresponding adjustment may be required for tax purposes. · The secondary adjustment ensures that the tax consequences align with the revised transfer pricing outcome.
Domestic Corresponding Adjustment	· PMK-172 emphasizes the need for domestic corresponding adjustments. · These adjustments are made to the tax base of the taxpayer in the country where the related-party transaction occurs. · The goal is to prevent double taxation or double non-taxation resulting from transfer pricing adjustments.
Mutual Agreement Procedure (MAP)	· The MAP is a dispute resolution mechanism provided by tax treaties. · PMK-172 encourages taxpayers to use the MAP to resolve transfer pricing disputes between Indonesia and other countries. · It allows competent authorities to negotiate and reach an agreement on the appropriate transfer pricing treatment.
Advanced Pricing Agreement (APA)	· PMK-172 introduces provisions related to APAs. · APAs are pre-agreed transfer pricing methods between taxpayers and tax authorities. · They provide certainty and reduce the risk of transfer pricing disputes by determining the appropriate pricing in advance.

Key Highlights Introduced in PMK-172

Application of arm’s length principle

Expansion of scope:

· PMK-172 broadens the scope of transactions subject to the arm’s length principle.

· It clarifies the definition of “control” within the context of establishing a “special relationship.” This definition encompasses both direct and indirect control, shared control through management or technology, the presence of common decision-makers, and commercial and/or financial affiliations.

· The arm’s length principle now applies not only to transactions between related parties but also to transactions involving parties without a “special relationship” where the related party of one or both of the parties determines the counterparty and the transaction price.

Reinforcement of Ex-Ante Principle:

· The ex-ante principle emphasizes that taxpayers should establish their transfer pricing policies before entering into related-party transactions.

· PMK-172 reinforces this principle, encouraging taxpayers to proactively assess and document their transfer pricing arrangements.

Additional guidance on transfer pricing methods and comparability analysis:

· PMK-172 provides detailed guidance on various transfer pricing methods (e.g., comparable uncontrolled price, resale price, cost plus, etc.).

· It also emphasizes the importance of conducting a thorough comparability analysis to select the most appropriate method for a given transaction.

Preliminary substance-check:

· Before applying the arm’s length principle, PMK-172 introduces a preliminary stage where taxpayers assess the substance of their related-party transactions.

· This substance-check ensures that the economic substance of the transaction aligns with its legal form.

Secondary Adjustment of Deemed Dividend and VAT

· PMK-172 addresses secondary adjustments related to deemed dividends and Value Added Taxes (VAT).

· When a primary transfer pricing adjustment is made (e.g., increasing the price of a related-party transaction), a corresponding adjustment may be required for tax purposes.

· The secondary adjustment ensures that the tax consequences align with the revised transfer pricing outcome.

Domestic Corresponding Adjustment

· PMK-172 emphasizes the need for domestic corresponding adjustments.

· These adjustments are made to the tax base of the taxpayer in the country where the related-party transaction occurs.

· The goal is to prevent double taxation or double non-taxation resulting from transfer pricing adjustments.

Mutual Agreement Procedure (MAP)

· The MAP is a dispute resolution mechanism provided by tax treaties.

· PMK-172 encourages taxpayers to use the MAP to resolve transfer pricing disputes between Indonesia and other countries.

· It allows competent authorities to negotiate and reach an agreement on the appropriate transfer pricing treatment.

Advanced Pricing Agreement (APA)

· PMK-172 introduces provisions related to APAs.

· APAs are pre-agreed transfer pricing methods between taxpayers and tax authorities.

· They provide certainty and reduce the risk of transfer pricing disputes by determining the appropriate pricing in advance.

DSA observations

The Indonesian Directorate General of Taxes (DGT) has continued to focus on compliance with the ex-ante principle, the expanded scope of transactions subject to the arm’s length principle, and the reinforcement of substance checks as part of the preliminary stage, indicating the DGT’s expectation of meticulous and well-supported transfer pricing analyses conducted by taxpayers.

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The secondary adjustments related to deemed dividends and VAT may indeed impose additional burdens and tax costs on taxpayers facing disputes. In such cases, the newly introduced avenues of corresponding adjustments and exemption from secondary adjustments of deemed dividends (subject to the repatriation of funds related to primary adjustments) are welcome developments. Taxpayers should carefully consider these options when assessing their dispute resolution strategies.

In conclusion, PMK-172 reflects the Indonesian government’s commitment to addressing some of the most controversial transfer pricing issues and promoting clarity and certainty. While it brings new opportunities, it also presents challenges. Taxpayers are strongly advised to evaluate the implications of these new guidelines on their businesses in Indonesia to navigate this transformative regulatory landscape successfully.

Singapore to implement Pillar Two income inclusion rule and domestic top-up tax from January 2025

In a significant move to bolster economic resilience and sustainability, Singapore’s Deputy Prime Minister and Minister for Finance, Mr. Lawrence Wong, unveiled the ambitious Singapore Budget 2024 on February 16, 2024. Amidst global economic fluctuations and a pressing climate crisis, the Budget strategically addresses the dual challenges of rising operational costs and the imperative for sustainable development, marking a pivotal step towards fortifying Singapore’s position as a competitive and green economy.

In anticipation of global tax reforms, Singapore’s proactive steps to implement the Income Inclusion Rule (IIR) and Domestic Top-up Tax (DTT) under the BEPS 2.0 framework demonstrate a forward-looking approach to ensure tax compliance and fairness. These measures reaffirm Singapore’s commitment to international tax standards while safeguarding its economic interests.

Transfer pricing highlights from the Singapore Budget 2024 include:

Singapore will implement the IIR under Pillar Two from businesses’ financial years starting on or after January 1, 2025. It means that MNE groups that are parented in Singapore will have to pay a minimum effective tax rate of 15 percent on their groups’ overseas profits, regardless of where they operate.
Singapore will implement the DTT under Pillar Two from businesses’ financial years starting on or after January 1, 2025. This applies to the Singapore profits of MNE groups operating here.
Both the IIR and the DTT will apply to large MNE groups with global revenue of at least EUR 750 million annually.
Singapore will consider another component of Pillar Two, the undertaxed profits rule (UTPR) at a later stage, to ensure a smooth rollout for the affected companies.

Other tax updates in the Singapore Budget 2024 include:

A new Refundable Investment Credit (RIC) scheme will be introduced, in line with the Global Anti-Base Erosion (GloBE) Rules, specifically addressing Qualifying Refundable Tax Credits (QRTCs). Under this scheme, eligible companies can offset the credit against their corporate income tax (CIT) liability. Importantly, the RIC will be refunded in cash within a four-year period from the time the conditions for receiving the credits are met.
New tiers for various concessionary tax rate incentives are available from February 17, 2024. These tiers aim to broaden access to tax benefits for a wider range of companies. Companies will have more flexibility to align their investments in Singapore with the benefits they expect to receive.
The fund tax incentive schemes have been extended until December 31, 2029. Notably, Section 130 will now apply to Singapore limited partnerships (LPs). Additionally, the economic criteria for these schemes will be revised, effective from January 1, 2025.
The Singapore government has introduced several schemes to support businesses, including a new CIT Rebate for the year of assessment (YA) 2024, a CIT Rebate Cash Grant, an enhanced Energy Efficiency Grant (EEG), enhanced tax deductions for renovation or refurbishment expenditure, and revisions to Additional Buyer’s Stamp Duty (ABSD) remission clawback rates for housing developers.

Manage Company Tax and Compliance across Multiple Jurisdictions

Singapore’s Budget 2024 represents a balanced approach to navigating the uncertainties of the global economy while establishing a resilient foundation for future growth. The tax developments introduced in this budget can be characterized as incremental changes in response to the current international geopolitical and business landscape. By prioritizing strategic tax reforms, supporting vulnerable populations, and addressing cost-of-living pressures, the government reaffirms its commitment to fostering a robust, inclusive, and forward-looking nation.

Hong Kong targets to implement IIR and DTT under Pillar Two from 2025

Hong Kong has released its annual Budget for the financial year 2024 to 2025, introducing a range of new tax and support policies for individuals and businesses. The measures include extensions to funding schemes for small and medium-sized enterprises, extensions on a subsidy scheme for electric vehicles, and a salaries tax reduction for individuals. Meanwhile, the government will introduce a two-tier salaries tax system to increase taxes on high earners, among other new arrangements designed to raise public funds.

Transfer pricing highlights from the Hong Kong Budget 2024-25 include:

Hong Kong aims to apply the global minimum tax rate of 15 percent on large MNE groups with an annual consolidated group revenue of at least EUR 750 million and impose the Hong Kong minimum top-up tax starting from 2025.
It is now conducting a consultation on the implementation of the above proposals and expects to submit a legislative proposal to LegCo in the second half of 2024.
It is estimated that these proposals will bring in tax revenue of about HK$15 billion for the Hong Kong government annually starting from 2027-28.

Other tax adjustments include:

The Budget 2024-25 will implement a new two-tiered tax rate regime for salaries and tax under personal assessment from the 2024 to 2025 assessment year onward. This aims to boost public revenue by increasing taxes on high earners while avoiding placing additional tax burdens on the majority of people and damaging the low-tax regime for which Hong Kong is known. Under the two-tiered system, taxpayers with net income exceeding HK$5 million (US$638,630) would see a 16 percent standard rate applied to the portion exceeding HK$5 million. This would affect around 12,000 taxpayers, boosting government revenue by approximately HK$910 million (US$116.23 million) annually. Under the previous system, the rate was capped at 15 percent.
Meanwhile, the government will also introduce a progressive rating system for domestic properties from the first quarter of 2025 onward. Property rates are taxes levied on property owners in Hong Kong, with the current rate set at 5 percent of the rateable value of the property. The Hong Kong Rating and Evaluation Department states that the new rating system will raise rates to 8 percent on the rateable value of between HK$550,000 (US$70,249) and HK$800,000 (US$102,180), and to 12 percent on properties on a rateable value exceeding HK$800,000. The 2024-25 Budget estimates that the hike will contribute around HK$840 million annually to government revenue from the fourth quarter of 2024-25 onwards.
Finally, the government also proposes the resumption of the Hotel Accommodation Tax (HAT) collection at a 3 percent rate from January 2025 onward. This is expected to increase government revenue by about HK$1.1 billion (US$140.5 million) annually. This collected HAT is estimated to account for less than 1 percent of the total spending of overnight visitors in Hong Kong. Additionally, the government plans to allocate over HK$1 billion (US$127.73 million) for upgrading tourism infrastructure and services to attract more high-spending overnight visitors in the coming year.

About the Brief:

Asia remains one of the world’s primary investment hubs, attracting an increasing number of businesses that have either expanded or are contemplating expansion into its high-performing emerging markets. For multinational enterprises (MNEs), transfer pricing is an important issue that demands attention sooner or later.

Transfer pricing concerns the pricing arrangements between associated enterprises (AE) operating in different tax jurisdictions for their intercompany transactions. In alignment with international regulations, Asian taxpayers engaged in transactions with other group entities must substantiate that these dealings adhere to the “arm’s length standard.” This standard necessitates taxpayers to prove that their transactions with related parties mirror those with third parties in a similar manner and under comparable conditions.

Nevertheless, the transfer pricing landscape has grown more complex in recent years and can be challenging for MNEs to navigate successfully. Apart from the international transfer pricing initiatives spearheaded by the Organization for Economic Co-operation and Development (OECD), individual governments are intensifying their own tax and regulatory frameworks overseeing transfer pricing. This heightened focus aims to protect their tax revenue amid financial constraints caused by the three-year COVID-19 pandemic and to manage domestic jurisdiction compliance in a dynamic global business environment.

In this scenario, it is crucial for foreign investors to stay on top of international and regional transfer pricing updates in order to effectively address their global transfer pricing concerns. Consequently, starting Q3 2023, our team of Dezan & Shira transfer pricing and tax professionals have taken the initiative to produce a quarterly Asia Transfer Pricing Brief. This brief will succinctly summarize timely transfer pricing news, aiming to provide you and your Asia-based business with a strategic advantage in managing international taxation issues and ensuring compliance.

Dezan Shira & Associates’ transfer pricing practice helps companies conduct transactions with related parties to deal with transfer pricing issues. The services provided by our tax professionals are comprehensive and tailored to each client’s individual needs, often arising from the uniqueness of its business operations. For any support regarding transfer pricing documentation, benchmark study, tax audits, and transfer pricing policy monitoring, please contact China@dezshira.com.

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