Assessing OECD TP Guidelines‘ Place in Indonesian Tax Law
TRANSFER pricing is the assessment of prices for transactions between related parties, for example, between a parent company/holding and its subsidiaries within a multinational enterprise (MNE) group. The transactions are varied, ranging from the sale and purchase of goods, services between group members, royalties on brands and technology, inter-affiliate loans, asset transfers or business restructuring through to the allocation of joint costs.
This practice is itself legitimate, since every group needs to set prices for its internal transactions. Problems only arise if those prices are deliberately made to differ from what independent parties would agree upon, with the aim of shifting profits from high-tax jurisdictions to low-tax ones (Darussalam, Septriadi and Kristiaji, 2022).
To prevent this, Article 18 paragraph (3) of the Income Tax Law (ITL) authorises the Directorate General of Taxes (DGT) to adjust prices deemed not at arm's length. A taxpayer that disagrees may file an objection, appeal to the Tax Court, and in certain cases apply for a civil review to the Supreme Court. For more than three decades, such disagreements have been resolved as ordinary tax disputes.
That pattern is now beginning to shift. During 2026, law enforcement authorities began pursuing criminal proceedings in respect of alleged transfer-price manipulation, particularly in commodity exports. The aspects under investigation are no longer limited to pricing differences but also extend to allegations of attempts to disguise transactions. Those cases remain at the investigation stage, thus, the presumption of innocence continues to apply. Nevertheless, the direction of change is clear: disputes relating to transfer pricing no longer invariably end at the objection and appeal stage.
For taxpayers, this shift has tangible consequences. Transfer pricing documents prepared in accordance with the OECD Transfer Pricing Guidelines (OECD TP Guidelines) have hitherto been regarded as a mere annual administrative obligation. The same documents may now serve as materials for a defence when a company is accused of manipulating prices.
The strength of that defence will naturally depend on the standing of the OECD TP Guidelines within Indonesian law and that is where the difficulty lies. The Guidelines have never been ratified; Indonesia is not a full member of the OECD and Law 12/2011 does not list them as part of the statutory laws and regulations. Yet they serve as the principal reference when transfer pricing regulations are drafted, and courts in many countries cite them.
In the author's view, the OECD TP Guidelines cannot be treated as binding law, but it would equally be wrong to disregard them. Their standing is most accurately described as persuasive authority instead of formally binding, yet their substance is already embedded in domestic regulations and deserves to be taken into account by judges.
This article is presented in two parts. The first part (this article) examines the legal basis for transfer pricing in Indonesia, the standing of the OECD TP Guidelines as a source of law and how courts in four countries have treated them. The second part (the following article) examines judicial practice in Indonesia, the shift towards the criminal sphere and the steps that need to be addressed.
Legal Basis for Transfer Pricing
Rules on special relationships have existed since the 1983 ITL, but implementing guidelines were not published until a decade later, and their content was considered insufficiently clear (DDTCNews, 2026). Subsequent amendments to the ITL strengthened the DGT's correction powers, introduced advance pricing agreements (APAs) and added documentation requirements.
PER-22/PJ/2013 subsequently became the audit guideline for related taxpayers. Since 2016, the regulatory framework has followed post-BEPS standards: three-tiered documentation (master file, local file and country-by-country report), mutual agreement procedure (MAP) and the application of the arm's length principle (ALP) and APAs. All of these are now consolidated in MoF Reg. 172/2023.
The core correction power remains in Article 18 paragraph (3) of the ITL. This provision authorises the director general of taxes to redetermine income, deductions and debt as stated capital for related taxpayers. A special relationship itself arises by virtue of shareholding, control or family relationships. In groups with cross-holdings, determining who controls whom is not always straightforward.
The benchmark applied is the ALP, as though the special relationship did not exist. To measure this, the law refers to several methods: the comparable uncontrolled price method, the resale price method, the cost-plus method or other methods.
The Law on the Harmonisation of Tax Regulations (Harmonisasi Peraturan Perpajakan/HPP in Indonesian) reaffirmed the director general of taxes' authority and added a comparison of financial performance among similarly situated taxpayers as a detection tool. This implies that the DGT may use financial ratios of comparable companies to select the party that is audited first. Taxpayers whose margins fall well below the industry average will come under scrutiny even if that low margin may genuinely reflect the state of their business (DDTCNews, 2022).
Gov. Reg. 55/2022 then provides an operational definition of the ALP and regulates one consequence that is often overlooked. The difference between the price that should be established under the ALP and the price actually used is treated as an indirect distribution of profit to the affiliate, and accordingly treated as a dividend.
As a result, a single transfer pricing adjustment may give rise to two assessments: a corporate taxable income adjustment and Article 26 Withholding Tax on the undeclared dividend. This mechanism is known as a secondary adjustment.
At the technical level, MoF Reg. 172/2023 regulates implementation in greater detail. On methods, Article 9 establishes a three-tier hierarchy that must be followed in sequence. The first tier is the comparable uncontrolled price method. The second tier comprises the resale price method and the cost-plus method. The third tier comprises the profit-split method, the transactional net margin method or asset and business valuation. The transactional net margin method is expressly placed as a last resort (DDTCNews, 2023).
The same regulation also governs procedure. Transfer pricing documentation must be available no later than four months after the tax year ends and must be submitted within one month of being requested. An APA may also be applied to prior years. If such application results in an underpayment, the taxpayer may amend the annual income tax return without incurring penalties. The outcome of a MAP is set out in a mutual agreement decision letter, which serves as the basis for tax collection or refund.
Despite appearing comprehensive, these rules still leave considerable room for interpretation. Setiawan (2026) identifies three recurring sources of disagreement between the DGT and taxpayers: the choice of method, the limited availability of comparable data and the application of the substance-over-form principle, which sometimes sets aside lawful legal structures.
The United States regulates transfer pricing through Section 482 of the Internal Revenue Code, elaborated in highly detailed implementing regulations. Indonesia has chosen a brief formulation at the statute level and leaves the detail to subordinate rules. This approach is flexible, but in practice, auditors may reach different conclusions on similar cases.
Looking ahead, the potential for disputes may increase with the introduction of the global minimum tax (Pillar Two) through MoF Reg. 136/2024. Transfer pricing assesses the arm's-length nature of prices transaction by transaction, whereas Pillar Two assesses the effective tax rate overall. This difference in perspective could become a new source of disputes.
Accordingly, the legal basis for transfer pricing in Indonesia is complete on paper. The difficulty is that the broadly worded provisions give the tax authority wide discretionary room and it is in that space that international guidelines frequently serve as interpretive reference.
Tax Treaties and the Lex Specialis Principle
Beyond domestic rules, two international instruments are frequently cited in transfer pricing disputes: tax treaties and OECD guidelines. The two must be distinguished because their legal standing differs. A tax treaty is an agreement between two countries to allocate the jurisdiction to tax over cross-border income and to prevent both double taxation and tax avoidance.
The government is authorised to enter into tax treaties under Article 32A of the ITL, and ratification requires only a presidential decree without parliamentary approval (Ministry of Finance, 2023). The process is faster than in many countries that involve the legislature. The drawback, as noted by Surahmat (2005), is that the quality of a tax treaty depends heavily on the negotiating team's capability, because there is no legislative supervision capable of correcting an unfavourable outcome before the treaty becomes binding.
Where a tax treaty contradicts a domestic provision, the treaty prevails. Three reasons are commonly advanced. First, a tax treaty is an international agreement that cannot be unilaterally departed from by one country's domestic legislation. Second, a tax treaty is the product of aligning two tax systems, so the interests of both countries have already been taken into account. Third, a tax treaty is more specific than generally applicable domestic provisions, thus, the principle of lex specialis derogat legi generali applies (Darussalam, 2016).
That advantage has its limits. Tax treaty benefits may only be enjoyed by the beneficial owner. A recipient acting merely as an intermediary, without genuine entitlement to the income, is not entitled to the reduced rate. This prevents treaty shopping, i.e., the practice of interposing an intermediate entity with no business activity in a favourably treaty-networked country. Notably, this concept originates from the OECD Model Convention and its Commentary. So when the DGT denies tax treaty benefits on beneficial-owner grounds, that denial is essentially grounded in an interpretation derived from the OECD.
OECD TP Guidelines as Soft Law
The OECD Model Convention, its Commentary and the OECD TP Guidelines differ from tax treaties in that Indonesia has never ratified them. Indonesia's participation in the Inclusive Framework on BEPS since 2016, which now comprises more than 140 jurisdictions, is a policy commitment, not a ratification.
Law 12/2011 does not include guidelines from international organisations in the hierarchy of statutory laws and regulations. Accordingly, as a matter of formal law, the OECD TP Guidelines are not a source of law. They are soft law, namely norms that are not legally binding but remain influential because they are adopted by policymakers or used by authorities and courts as an interpretive reference.
Their influence in Indonesia turns out to be far greater than it appears. The five OECD comparability factors, including characteristics of goods or services, functional analysis, contractual terms, economic conditions and business strategies, have become the everyday language of audits in Indonesia.
BEPS Actions 8–10 shifted the focus from contract terms to the reality of transactions (accurate delineation of the actual transaction): an entity is recognised as bearing risk only if it genuinely controls that risk and is financially capable of assuming it. The development, enhancement, maintenance, protection and exploitation (DEMPE) framework applies the same logic to intangible assets, thereby, the right to profit belongs to the entity that performs all five functions, not merely the one that holds the certificate (OECD, 2015).
The five methods in Gov. Reg. 55/2022, the hierarchy of methods in MoF Reg. 172/2023, the three-tiered documentation from Action 13 and the DEMPE framework applied by the DGT since 2020 all originate from that source (Akhmadi, 2025). The substance of the Guidelines has been absorbed through domestic regulations and administrative interpretation without ratification, a process often referred to as indirect reception.
Nor was that absorption uncritical. Since 2010, the OECD has moved away from a rigid method hierarchy in favour of the most appropriate method rule — selecting the method best suited to the facts of the transaction. MoF Reg. 172/2023 instead adopts a mandatory hierarchy. This provides greater procedural certainty, but it narrows the taxpayer's scope to argue that a different method would be more appropriate (Darussalam, Septriadi and Kristiaji, 2022).
Among academics, the standing of the ALP itself remains contested. Wittendorff (2010) regards it as a general principle of international tax law inherent in the concept of income, such that the OECD guidelines are merely a technical elaboration of a norm that is already binding. Eden (1998), by contrast, views transfer pricing deviations as a structural consequence of the existence of multinational companies, not necessarily intended to avoid tax.
Avi-Yonah (2007) traces the principle to a political compromise in 1935; Picciotto (1992) proposes unitary taxation with formulary apportionment; and Durst (2010) warns that the ALP requires comparable data that is only abundant in countries with deep capital markets.
The author does not seek to resolve that debate. However, in the Indonesian context, one point must be made clear. To treat the OECD TP Guidelines as "not law" is incorrect, because their substance has already become part of the rules that must be complied with. To treat them as "binding" is equally incorrect, because they have never been ratified. The appropriate characterisation is persuasive authority, namely guidelines that are not formally binding (binding authority), but that a judge ought to take into account as a reasoning aid insofar as they are consistent with domestic provisions.
How Courts in Other Countries Treat the OECD Guidelines
The persuasive standing of the OECD guidelines is most clearly visible in foreign court decisions. The four decisions below were chosen because each tests a different question: how far guidelines that have not been ratified may influence the outcome of a tax case.
In Canada v. GlaxoSmithKline Inc., the Supreme Court of Canada examined the price of ranitidine, the active ingredient in the drug Zantac. The Canadian subsidiary purchased it from a Swiss affiliate at C$1,512–C$1,651 per kilogram, whereas generic drug manufacturers purchased it from other sources at C$194–C$304 per kilogram (Supreme Court of Canada, 2012). The company argued that its purchase was governed by a licence agreement granting it exclusive rights to manufacture and market Zantac using the group's brand and technical know-how.
The Court held that the OECD guidelines were not binding in the same way as a Canadian statute, but nonetheless used their methodology as an analytical tool. Arm's length terms had to be assessed holistically, including the licence agreement. Both the government's appeal and the company's cross-appeal were dismissed. The case was remitted to the Tax Court to redetermine the arm's length amount.
In Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, the Full Federal Court of Australia examined an unsecured credit facility of approximately USD2.5 billion from a United States affiliate at an interest rate of approximately 9%. Chevron Australia argued that, at the construction stage, it had no assets that could be offered as security (Full Federal Court of Australia, 2017).
The Court did not assess the borrower as if it were a standalone entity. The question was what Chevron Australia, as part of the group, would commercially have undertaken. The answer was to borrow with the backing of an AA-rated parent at a much lower interest rate. The tax authority's correction was accordingly upheld. This implicit group support logic is consistent with the OECD guidance on financial transactions between affiliates, even though that guidance was not published until 2020 (OECD, 2020).
In Altera Corporation v. Commissioner of Internal Revenue, Altera refused to include share-based compensation in a research cost-sharing agreement with its Cayman Islands affiliate, notwithstanding that 2003 US Treasury regulations required it to do so. Altera adduced evidence that independent parties did not share such costs. The United States Tax Court unanimously held in 2015 that the regulation was invalid (United States Tax Court, 2015).
However, the Ninth Circuit reversed that decision in 2019 by a majority of two to one. The regulation was held to be a reasonable interpretation of Section 482, given the difficulty of finding comparables for unique intangible assets (United States Court of Appeals for the Ninth Circuit, 2019). The ALP may indeed be used to test a regulation, but its force remains constrained by the text of the domestic statute.
In Vodafone India Services Pvt Ltd v. Union of India, the Indian tax authority took the view that Vodafone India had issued shares to its parent at too low a premium. The difference of approximately INR1,308.91 crore was treated as a disguised loan, the interest on which was subject to tax. The Bombay High Court rejected that contention in October 2014.
A share issuance is a capital transaction that does not give rise to income and therefore falls outside the scope of transfer pricing rules from the outset (Writ Petition No. 871 of 2014). The lesson is that, before debating whether a price is arm's length, it must first be established whether the transaction is subject to the transfer pricing regime at all.
These landmark cases are also discussed in the book Transfer Pricing: Ide, Strategi, dan Panduan Praktis dalam Perspektif Internasional, Edisi Kedua, Volume I dan II, published by DDTC in 2022 and 2023.
The common thread is that not one court treated the OECD guidelines as statute, yet none disregarded them either. The guidelines were used as a conceptual framework insofar as they were consistent with domestic law.
Outcomes were determined by the strength of the parties' factual and economic arguments: the licence argument in GlaxoSmithKline; the group-affiliation argument that ultimately worked against Chevron; the empirical evidence at first instance in Altera; and the argument about the nature of the transaction in Vodafone. This is what the author means by persuasive authority, namely the guidelines are considered because their reasoning is convincing, not because they are binding.
For Indonesia, the lesson is clear. The strength of transfer pricing documents in the courtroom does not rest solely on their compliance with the OECD TP Guidelines, but on how convincingly those documents explain the economic substance of the transactions within the framework of domestic law.
What about courts in Indonesia? The second part of this article will address that question and will also examine what changes when disputes relating to transfer pricing begin to be handled as criminal matters.
*This opinion article represents the personal views of the author and does not reflect the position of any institution with which the author is affiliated.