Indonesia Tackles Transfer Pricing and Treaty Shopping Risks

Indonesia is confronting rising tax erosion as multinational corporations use transfer pricing and treaty shopping to shift profits abroad. The issue was highlighted in a DDTCNews article released on 28 October 2025.

Transfer pricing sets prices for intra‑group transactions; when prices ignore the arm’s‑length principle, profits can be moved to low‑tax jurisdictions. Treaty shopping involves establishing shell companies in countries with favorable tax treaties to obtain reduced withholding rates. The article proposes applying the OECD Pillar 1 and Pillar 2 framework, enhancing the Directorate General of Taxes’ data analytics, and introducing anti‑treaty‑shopping rules such as the principal purpose test.

These practices diminish Indonesia’s fiscal capacity, limiting funds for infrastructure, health, and education. Strengthening tax administration and international cooperation aims to restore revenue equity and deter profit shifting. Continued reforms are essential to protect the tax base and ensure fiscal fairness.