Arm's Length Principle
The Arm's Length Principle (PKKU) requires that prices or profits in related-party transactions must equal those between independent parties in comparable circumstances. Governed by Article 18 paragraph (3) of the Income Tax Law and PMK No. 172/PMK.03/2023. Recognized PKKU methods include: Comparable Uncontrolled Price (CUP), Cost Plus, Resale Price, Profit Split, and Transactional Net Margin Method (TNMM). PKKU aligns with the OECD Transfer Pricing Guidelines.
This article is for education, not tax advice.
Example
PT A (Indonesia) lends to its Japanese affiliate at 3% interest; market rate for comparable loans is 6%. Under PKKU (CUP method), DJP may adjust the interest rate to 6%.
Source: Article 18 paragraph (3) UU PPh No. 36/2008; PMK No. 172/PMK.03/2023
Related terms