Arm^s Length Principle Analysis on Tax Avoidance through Domestic Intercompany Transfer Pricing Post-Pandemic Covid-19: A Case Study
Natalina (a*), Apollo (b)

a) Accounting Program, Universitas Dian Nusantara, Indonesia
*lins.undira[at]gmail.com
b) Economics & Business Faculty, Universitas Mercu Buana, Jakarta, Indonesia

Abstract

Covid-19 pandemic had forced the society to adapt with technology advancement and decision-making behavior in corporate management. In response, companies implement transfer pricing strategy to ease the tax burden in order to optimize expenditure efficiency and maximize profitability. Beside its commonality among multinational companies, researcher observed that transfer pricing had been utilized significantly between related domestic companies that may bring potential loss of state tax revenue. On the other hand, in principle, transfer pricing is legal-wise and tax-wise permitable as long as it applies the arm^s length principle. This research was conducted in the form of case study with the objective to analyze the application of arm^s length principle on tax avoidance activitiy through transfer pricing between domestic companies by exploring its theoretical model. The analysis comprises five methods, namely the price comparison method between independent parties, the resale price method, the cost-plus method, the profit-sharing method, and the transactional net profit method. The evaluation of a company^s arm^s length principle can be utilized as a basis for recommendation, both for related companies to optimize tax planning and for policy makers in an effort to mitigate the risk of losing state revenue. This study is imperative in understanding post-pandemic impact for corporations as a mean of adaptation and going concern- specifically on how transfer pricing among specially-related domestic companies have become a cost-cutting effort. This study is expected to bring guidance for the following researches and contribution for government in overcoming the potential rise of domestic transfer pricing in post-pandemic.

Keywords: Arm^s Length Principle, Domestic Company, Transfer Pricing, Tax Avoidance

Topic: Business, Corporate Governance, and Accounting