ARM'S LENGTH PRINCIPLE TO PREVENT THE PRACTICE OF THE ABUSIVE TRANSFER PRICING AMONG MULTINATIONAL COMPANIES IN INDONESIA

Abstract

The rapid growth of multinational companies in Indonesia marks its prosperous of investment
and industrial climates. However, on the other hand, the growth of these companies is also used
to deceive the government in terms of tax payments by abusing the transfer pricing to
manipulate the company’s financial statements. Thus, a system to prevent those kinds of
lawlessness is indispensable. This study aims to comprehend the implementation of the Arm’s
Length Principle (ALP) that is stipulated in the laws and regulations of the Republic of
Indonesia to prevent the practice of the Abusive Transfer Pricing (ATP). Besides, it also aims
to find out the characteristics of the ALP that is internationally stipulated in preventing the ATP
practice. This study uses the normative and perspective methods to understand the
characteristics of the ALP in preventing the practice of the ATP. The analysis is carried out by
scrutinizing both primary and secondary legal sources. The primary legal sources include rules
of law, legal principles, and legal doctrines to achieve the coherence truth. The secondary
sources, moreover, comprise books, journals, and other sources related to the issue. This study
further applies the statute, comparative, and conceptual approaches in carrying out the analysis.
In the Indonesian Taxation Law, the ALP and other technical regulations stipulated in Article
18 paragraph (3) and Article 18 paragraph (3a) of the Law Number 36 of 2008 on Income Tax
have the similar characteristics with the Organization for Economic Cooperation and
Development (OECD) Model Tax Convention and the United Nations (UN) Model Double
Taxation Convention. However, the Indonesian ALP is more complexly stipulated to meet the
interest of state taxation. It is affirmed that even though the implementation of the principle is

different due to the diversity of the principles of taxation and each country’s interests, the
ALP’s characters still apply in general and cannot be separated in their application.