Abusive transfer pricing typically involves shifting profits from high-tax countries to low-tax jurisdictions or even tax havens. For example, a large company might have an entity in a country with very low tax rates, such as in the Caribbean or Eastern Europe. 

The entity in that low-tax country is charged lower prices for products or services sold by the parent company based in a higher-tax country, such as Indonesia. As a result, net profits in the high-tax country are significantly reduced, and the company’s tax liability in Indonesia decreases. Overall, this strategy reduces the total amount of taxes paid globally by shifting profits to countries with lower tax rates.

While transfer pricing itself is not an illegal practice, it becomes a serious issue when used inappropriately to violate the arm's length principle. This principle requires companies to set prices for transactions between related entities as if they were dealing with unrelated third parties. However, in practice, price manipulation to reduce tax liabilities is a common motivation for such violations. This is where the biggest problem with transfer pricing as a form of tax evasion lies.

Indonesia is particularly vulnerable to abusive transfer pricing practices. As a developing economy with a large market, Indonesia attracts many multinational companies to operate within its borders. However, these companies often take advantage of regulatory gaps or the government’s limited capacity to monitor transfer pricing in ways that harm the country. 

According to reports from the Directorate General of Taxes, transfer pricing practices are estimated to result in the loss of billions of dollars in potential tax revenue each year. This is a staggering amount, especially given that taxes are one of the country’s main sources of income used for infrastructure, education, healthcare, and various social programs.

Several high-profile cases involving transfer pricing have come to light in recent years. Many large companies have been taken to tax courts over allegations of using this strategy to reduce their tax liabilities. For example, companies in the technology, pharmaceutical, and manufacturing sectors are frequently implicated in scandals related to transfer pricing. 

However, investigations and legal actions against transfer pricing cases are often hampered by the lack of international cooperation in tax information exchange. Without full access to cross-border transaction data and support from tax authorities in other countries, many transfer pricing cases are difficult to fully resolve.

Globally, the Organization for Economic Cooperation and Development (OECD) has launched the Base Erosion and Profit Shifting (BEPS) initiative, aimed at tackling transfer pricing and other tax avoidance practices. This initiative emphasizes greater transparency, country-by-country reporting, and cooperation between tax authorities in different countries. 

Indonesia has also committed to adopting several recommendations from the BEPS program. However, the success of this initiative largely depends on each country’s ability to implement it effectively, meaning Indonesia still needs to strengthen its regulations and oversight in this area.

In addition to the government’s role, companies also bear a moral responsibility to pay taxes in line with their contributions to the countries where they operate. Taxes should not be seen merely as a burden to avoid but as a contribution to the society and country that support their operations. 

In the long run, abusive transfer pricing practices not only harm the country but also damage the company’s reputation in the eyes of the public. In today’s era of information transparency, corporate transparency regarding tax obligations is an important factor in building consumer and investor trust.

Therefore, unfair transfer pricing must be stopped. Governments, companies, and society must unite to promote fair and transparent tax practices. By doing so, we can ensure that tax revenue is used for the common good, rather than continuing to flow out of the country through irresponsible tax manipulation practices. (*)

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*) Oleh : Silmi, S.E., M.Ak., Dosen PNS Akuntansi Fakultas Ekonomi dan Bisnis, Universitas Andalas.

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