Transfer pricing starts with the transaction.

A benchmark becomes useful when the transaction being tested has been understood. The first question is therefore a business question: what actually happens between the parties?

Begin with an explanation of the business

A local file should allow a reader to follow the transaction from the commercial arrangement to the financial result. Identify the parties, the goods or services involved, the responsibilities each party performs, and the way each party earns its return. A contract is an important starting point. Operational records help explain how that arrangement is carried out.

The OECD Transfer Pricing Guidelines provide the international framework for applying the arm’s length principle. In Indonesia, PMK 172 Tahun 2023 addresses its application and transfer pricing documentation. The analysis needs to be grounded in the relevant facts and the rules applicable to the period being considered.

Connect the functional analysis to the numbers

A description of functions, assets, and risks should connect with the company’s own financial records. For example, a narrative describing a distributor needs to be consistent with the revenue, inventory, operating costs, and working capital reflected in the analysis.

Where different activities are combined in the accounts, consider whether the available information supports a meaningful separation. The basis for an allocation should be explained and traceable. A segment that cannot be reconciled creates an additional question for the reader, even where the overall accounts are correct.

Make the evidence easy to follow

A practical working file can connect agreements, invoices, business explanations, accounting entries, and the figures used in the economic analysis. Differences between those sources should be investigated and explained. An unresolved difference should remain visible in the working papers so that the limitations of the conclusion are understood.

Timing also matters. Article 17 of PMK 172 Tahun 2023 requires master and local files to be based on data and information available when the related-party transactions are undertaken. Maintaining records of the assumptions and information available at the time helps distinguish the original commercial decision from later developments.

Use the benchmark to answer a defined question

Once the arrangement, tested activity, and financial basis are clear, the comparability exercise has a more precise purpose. Method selection, the search for comparables, and the treatment of differences can then be explained in relation to the actual transaction.

Our practical starting point is a coherent chain of reasoning: commercial facts, supporting records, economic analysis, and an explanation of the conclusion. The quality of that chain is valuable both when preparing documentation and when responding to questions about it.

This perspective provides general information and does not constitute legal or tax advice. The facts and applicable requirements need to be assessed for each arrangement.