THE RESUME OF TRANSFER PRICING MEASURES AND EMERGING DEVELOPING

ECONOMIES
By Fatima Tria Anjani

Transfer pricing is the determination of prices for the delivery of goods, services or
intangible assets between affiliated companies. Transfer pricing is carried out with a view to
measuring the performance of each affiliated entity and to minimize costs.
But now transfer pricing refers more to the parent company's goal to reduce the tax
burden through affiliated companies in countries with low tax rates. This is what makes transfer
pricing to lead to tax avoidance so the term transefr pricing manipulation appears.
Transfer pricing manipulation is a form of tax avoidance which is used to minimize tax
burden by transfer pricing with affiliated companies in countries with low rates.
For example a multinational company has a tax rate in the country where the parent company
(Indonesia) lives at 25% and has subsidiaries in other countries, namely Singapore with a tax
rate of 17%, the parent has an incentive to divert profits to its subsidiaries by reducing the tax
rate on this amount from 25% to 17%.
The existence of transfer pricing manipulation results in the tax agency making a
measure to counter transfer pricing manipulation. This regulation was made so that the price
given to affiliated companies was comparable to the price given to independent companies in
the form of arm ’length length principle.
Arm's length principle is a principle whereby the price of transactions between affiliated
companies must be comparable to the price given to an independent company in the same
transaction because transactions carried out with independent companies use market prices.
Arm ‟s length priciple methods include:
1. Comparative uncontrolled Price Method (CUP), comparing the prices charged for
property or services used in services that are transferred in uncontrolled transactions
under certain circumstances.
Indicator : based on market price
Example : transaction of comodity goods, it prices always based on market price so the
transaction between afiliated transaction must be comparable with main enterprise
between independent enterprise.
2. The resale price method (RPM), is used if the seller buys a product from a related
company.
Indicator : based on gross margin
3. Cost plus-Method (CPM) determines the price of Arm ’length by adding gross profit
margins that correspond to the associated company costs to produce products or
services. The gross profit margin reflects the function performed by an entity and
includes the return on the capital used and the risk that the entity receives.
4. The Profit Split Method, identifies profits from transactions that are controlled
between related companies that will be allocated among them. This profit is then
divided between economically related companies based on their relative contributions.
There are 2 versions of profit split method: (1) comparable profit split method, (2)
residual profit split method
Indicator : based on operating margin
5. Transactional net margin method, to determine the price of general transfers, and
also for net income from controlled transactions relative to the right basis such as asset,
sales or costs.
Indicator : based on operating margin
The problem faced by the use of the Arm ’length length method in determining
transaction prices or profits from transactions controlled by transactions that cannot be
controlled is that the interests held by the parent company and affiliated companies
cannot be compared to an independent company. As a result, arm ’s length method is
difficult to apply. Thus it may be contended that the arm’s length principle can only
be applied in limited situations where direct comparable uncontrolled transactions exist
and that it is inadequate as a basis for allocating the profits of international enterprises.