Arm's Length Transactions and Corporate Evidence in Tax Transfer Pricing Disputes

Abstrak

This article outlines the establishment of arm's length standards for related party transactions and corporate standards of proof in transfer pricing audits and disputes. The arm's length principle requires that related party transactions be assessed as if they were conducted between independent parties. The HPP Law and KUP Law provide the basis for the tax authorities' authority to examine and adjust reports when prices or profits deviate from the standard of fairness, while PMK 213/PMK.03/2016 stipulates documentation requirements through Master Files, Local Files, and Country-by-Country Reports as the main instruments of evidence. The standard of reasonableness is established through comparability tests, the selection of transfer pricing methods, and the assessment of economic substance based on function, assets, and risk. The standard of proof requires traceability between contracts, transaction realization, accounting, and reporting, including evidence of service benefits, royalty bases, and the rationality of intra-group financing. During audits, the quality of documentation determines the scope for correction, while in objections and appeals, the standard of proof is re-examined according to the rules of procedure of the Tax Court. For cross-border transactions, the P3B provides a Mutual Agreement Procedure that requires consistency of evidence with the OECD Transfer Pricing Guidelines to avoid double taxation. This article concludes that the burden of proof is dynamic: the authorities present the basis for correction, then the company is required to substantiate its claim of fairness with verifiable data. Failure to meet the standard of proof results in administrative consequences under the KUP Law and may develop into a criminal tax risk if there is intent to submit false data.