Transfer Pricing aspects of Intangible Assets

With the business landscape becoming more global, technology-driven and service-oriented, intangible assets are becoming an increasingly  crucial component of a multinational company's value and growth strategy. These assets provide a unique competitive edge, enhance revenue streams and significantly contribute to a company's overall success and market positioning in the modern economy.
According to the OECD Transfer Pricing Guidelines (OECD TPG), intangible assets are defined as something that is neither physical nor a financial asset, which is capable of being owned or controlled for use in commercial activities, and the use or transfer of which would be compensated if it occurred in a transaction between independent parties under similar circumstances. 

The arm´s length principle 

In order to comply with the Indonesian transfer pricing regulation, transactions involving intangible assets between related parties must be conducted at arm's length. According to the national Transfer Pricing regulation (PMK-22/2020), the application of the arm’s length principle involving intangible assets must involve a set of “preliminary steps” in order to prove:
  1. the existence of intangible assets economically and legally;
  2. types of intangible assets;
  3. value of intangible assets;
  4. parties who legally own the intangible assets;
  5. parties who economically own the intangible assets;
  6. the explanation on the use or the right to use the intangible property; 
  7. parties who contribute and carry out development, enhancement, maintenance, protection and exploitation activities of the intangible assets (DEMPE analysis); and
  8. economic benefits obtained by the use of the intangible assets.

Intangible Development, Enhancement, Maintenance, Protection 

and Exploitation (DEMPE) 

The Indonesian tax authority explicitly emphasizes several aspects of intangible Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE). 
The analysis helps determine the allocation of profits and risks between related parties based on their respective contributions and activities in the intangible assets' life cycle. It ensures that related-party transactions involving intangible assets are conducted on an arm's length basis, and that the appropriate allocation of profits and risks aligns with the functions performed and the risks assumed by the relevant entities.
The party performing the DEMPE function in this regard shall be deemed as a party that is entitled to the remuneration of income derived from the DEMPE functions. This is in accordance with the recommendations of the BEPS Action Plan and the OECD TPG, which emphasize the importance of information regarding the roles, functions, assets and risks of each member of the business group. 
The arm's length principle plays a vital role in ensuring fair and transparent pricing of intangible assets transactions within multinational companies operating in Indonesia. 


By following this principle, companies can avoid transfer pricing disputes, enhance tax compliance, and foster a favorable business environment, both domestically and internationally, while maintaining their unique competitive edge through the development or utilization of intangible assets.

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