Executing transfer pricing strategies for NHI in Indonesia

Founded in 1982 in Sichuan Province, China, New Hope is the largest private agricultural company and the largest feed producers in China, with an annual production capacity of 20 million tons. In 2006, New Hope began investing in Indonesia by establishing PT New Hope Indonesia (NHI). In 2008, Jakarta based NHI began commercial operations and has expanded in various cities across Indonesia including Surabaya, Medan, Lampung, Semarang and Makassar. NHI comprises of animal feed industry, breeding and cultivation of laying and broiler chickens. One of the top challenges for a Chinese business when entering a new market is the language barrier. Cultural and language differences can hinder effective communication and NHI needed a team of local advisors in Indonesia to help them overcome these challenges. To avoid any miscommunications issues between employees and investors which can lead to misunderstanding, NHI needed an advisory team they could trust. All laws and regulations in Indonesia are stated in Indonesian language with minimum translation in English. Misunderstanding or misinterpretation of the laws and regulations can easily happen to non-native speakers and could be harmful to foreign companies and its operations in the jurisdiction of Indonesia. Based on the Minister of Finance Regulation of the Republic of Indonesia No. 213/PMK.03/2016, certain taxpayers who have met certain conditions are required to prepare transfer pricing documentation under Section 34F of the Income Tax Act unless exemption for specified transactions apply. In this case, NHI who had transactions with related parties, met one of the requirements to prepare transfer pricing documentation.

At HLB Indonesia, they have Chinese-speaking staff who can communicate with Chinese clients in their native language. HLB Indonesia raised the transfer pricing documentation issue with NHI's management for careful consideration and immediate action. Our experts helped and supported NHI to prepare their transfer pricing documentation under the prevailing rules. The job involved cross-jurisdiction coordination to understand the whole structure of the Group. It was challenging because every jurisdiction has their own local rules and is often written in local languages. HLB closely cooperated and intensively communicated with counterparties to acquire information to prepare the transfer pricing documentation in accordance with Indonesian rules. They submitted the draft to the NHI head office and to the Group to obtain understanding on the transfer pricing methods applied and how allocation of functions, risks and assets to each related entity were involved before delivering this to the local tax authority. The approach utilised OECD Guidelines on transfer pricing documentation which is applicable among developed countries. OECD Guidelines have become a major reference to all jurisdictions. Although every jurisdiction has their own rules, they managed to have links and adaptation to OECD Guidelines.

HLB Indonesia was able to deliver the transfer pricing documentation which satisfied both NHI and the regulatory perspective as well. By utilising the OECD Guidelines in local transfer pricing documentation proved HLB Indonesia's ability to compile, summarise and apply transfer pricing rules from several jurisdictions into one report which is suitable for international application. It was a great achievement for HLB Indonesia. Transfer pricing documentation must be able to describe transactions and factual events in-line with rules and must be able to answer the challenges from tax office, which was successfully accomplished.