INTERNATIONAL TAX ISSUE

Permanent Establishment
and Transfer Pricing:
CASE DECONSTRUCTING CHEVRON TRANSFER PRICING

361200 Timothy Jevon Lieander

361225 Claudia Alexandra Kuswanto
365461 Denisha Muliasari

PERMANENT ESTABLISHMENT
Permanent Establisment or Badan Usaha Tetap is establishment
used by an individual who does not reside in Indonesia or in
Indonesia less than 183 days within a period of twelve months, or
entities not established or domiciled in Indonesia, to run the
business or activities in Indonesia
A Permanent Establishment implies the existence of a place of
business is a facility that can be land and buildings as well as
machinery, equipment, warehouse and computer or electronic
agent or automated equipment that is owned, leased, or used
by providers of electronic transactions to run business activity
through the Internet.

 The term Permanent Establishment includes especially:

a). a place of management;
b). a branch;

c). an office;
d). A factory;
e). a workshop;
f). a mine, an oil or gas well, a quarry or any other place of extraction of natural
resources.
g). fisheries , animal husbandry, agriculture, farms or forestry;
h).construction, installation or assembly project;
i).provision of services in any form by an employee or by anyone else , all made more
than 60 days within a period of 12 months;
j).agent or employee of an insurance company that is not established or domiciled in
Indonesia who received the insurance premium or risk in Indonesia

TAX OBJECT OF PE
a. income from business or activities of the PE and from property owned or
controlled;
b. headquarters income from business or activity, the sale of goods or
provision of services in Indonesia similar to the ones performed or carried
out by the PE in Indonesia;

c. income as stated in PPh 26 that is received or obtained

TAX CALCULATION ON PE
Taxable income after deducting income tax from a PE in Indonesia , will be
subject to PPh 26 amounted to 20 %
Except, they want to reinvested the taxable income in Indonesia, they wont
get cut from PPh 26

QUESTION 1
Taxable income of PT Foodz-Indonesia as a PE in Indonesia in 2013 is
Rp20.500.000.000,00
Calculate the PPh 26 that PT Foodz-Indonesia have to pay!

Taxable Income

Rp20.500.000.000,00

Income tax:
25% x Rp20.500.000.000,00 =

Rp 5.125.000.000,00 (-)

Taxable income after

deducted from income tax
PPh 26 payable:
20% x Rp15.375.000.000

Rp15.375.000.000,00
Rp 3.075.000.000,00

QUESTION 2
Coca Cola Indonesia pays royalties to the PT . Coca -Cola in the USA on the
licenses issued amounting to Rp 1,000,000,000 . How much income tax
withheld on the royalties ?

20% x 1.000.000.000= Rp 200,000,000

WHAT IS TRANSFER PRICING?

Inter-company transactions take place through
transfers of tangible and intangible property, the
provision of services, as well as inter-company
financing, rental and leasing arrangements, or even
an exchange of, for example, property for services
or the issue of sweat equity.
The basis for determining proper compensation is the
arms-length principle.

ARMS-LENGTH PRINCIPLE
The amount charged by one related party to
another for a given product must be the same as if
the parties were not related.
An arm's-length price for a transaction is therefore
what the price of that transaction would be on the
open market.
It determines how much of the profits should be
attributed to one entity.

CATEGORIES OF INTER-COMPANY
TRANSFER
Sales of tangible property
Sales of machinery and equipment
Sales of inventory
Transfer of intangible property
The provision of services
Financing transaction

TRANSFER PRICING GUIDELINES

AND METHODS
The tax authorities in the United States and a handful of
other countries started to pay considerable attention to
transfer pricing in the 1960s and 1970s.
The Organization for Economic Co-operation and
Development (OECD) was established in 1961 and
produced the OECD report and Guidelines on transfer
pricing which were first issued in 1979 and were
subsequently revised and updated in 1995 and again in
2010.

 Comparable uncontrolled price method

compares the price charged for goods or services
transferred in a controlled transaction to the price
charged for property or services transferred in a
comparable uncontrolled transaction.
Resale price method
deducting an appropriate discount for the activities of the
reseller from the actual resale price.
Cost plus method
The cost plus method determines the arms-length price
by adding an appropriate mark-up to the cost of
production

 Profit spit method

Dividing the profits of a multinational enterprise in a
way that would be expected of independent
enterprises in a joint- venture relationship.
Transactional net margin method
Looks at the net profit margin relative to an
appropriate base (e.g. costs, sales, assets) that a
taxpayer makes from a controlled transaction.

CASE OF THE CHAPTER : CHEVRON

Deloitte - Deconstructing the Chevron Transfer Pricing Case

WHAT IS CHEVRON CORPORATION?

NYSE:CVX

CHEVRON INCORPORATION
A United States Headquartered Firm
Publicly Traded in NYESE or the New York Stock Exchange,
the Biggest Stock Exchange Exists on Earth with its ticker
name NYSE:CVX
Founded 1879 as Pacific Coast Oil Company
1984 as Chevron Corporation.
It serves the World Wide area.
Its headquarter is situated in San Ramon, California
Its Products are known as the Petroleum, Natural Gas and
other Petrochemicals.
Employs approximately 65,000 people
Subsidiaries: Texaco, Inc and Citgo Petroleum Corporation

Deloitte - Deconstructing the Chevron Transfer Pricing Case

CHEVRON CASE OVERVIEW

The Federal Court issued its much anticipated decision in
Chevron Australia Holdings Pty Ltd v Commissioner of
Taxation ([2015] FCA 1092) on 23 October 2015.
Robertson J upheld transfer pricing assessments against
Chevron Australia Holdings Pty Ltd (CAHPL) related to
interest payments made to its US subsidiary, Chevron
Texaco Funding Corporation (CFC), under an
intercompany loan arrangement.
Agreement was equal to or less than arms length.
CAHPL therefore did not prove that the amended
assessments imposed by the Commissioner under
Division 13 were excessive

CHEVRON CASE OVERVIEW

The Chevron case should be seen in context as the first
big dollar transfer pricing case taken by the Australian
Taxation Office (ATO) to the Federal Court. It is also the
first test of the retrospective Subdivision 815-A laws
introduced by the Australian Government in 2012,
explicitly on the request by the ATO to shore up
Australias transfer pricing regime.
The Courts view on all of the above issues, and
potentially the views of the Full Federal Court if the case
is appealed, may have resonance with the OECD as it
further considers (in the context of the BEPS project) the
application of the arms length principle to intra-group
financing arrangements in 2016.

FACTS OF THE CHEVRON CASE

AUD at USD
2.5 billion
at LIBOR +
4.14% interest
rate

CFC was a wholly owned subsidiary of CAHPL. CFC

appears to be a resident of the United States and not a
resident of Australia.
CFC borrowed an amount of USD2.5 billion from the
commercial paper market at rates of interest at or below
USD LIBOR (approximately 1 to 2%)
CFC obtained a guarantee from Chevron Inc, the
ultimate parent of the group
USD 2.5 billion
CFC provided an intercompany loan to CAHPL for the
at 1% to 2%
AUD equivalent of USD2.5 billion, under the Credit Facility
interest rate
agreement
The interest rate under the Credit Facility agreement was
AUD LIBOR plus 4.14%

FACTS OF THE CHEVRON CASE

CAHPL drew down funds of approximately USD2.5 billion
in two tranches. Interest payments were also effected
through debits to the US dollar bank account
calculated by reference to the AUD principal amount
Interest Rate paid by CFC in the
borrowed
US at 1% to 2%
It appears that there was no interest withholding tax on
Actual Interest Rate Expense
the interest payments from CAHPL to CFC, presumably as
paid by CFC in the US = 5.96%
a result of Section 128F(8)
(7.46% - 1.5% (average US rate))
During cross-examination, it was indicated that CFC
was not taxable in the US on the interest income
Intercompany Interest Profit
Spread for CFC = 5.96%* US$ 2.5bi As a result of the interest differential, CFC generated
profits and it paid dividends to CAHPL, which were
Intercompany Interest Profit
exempt from tax in Australia
Spread for CFC = US$ 149 million
equivalent with IDR 2.033 Trillion CAHPL in turn paid dividends to its shareholder.
Interest Rate Expense
Calculated by CHPL to CFC =
7.46% (LIBOR at 3.32% + 4.14%)

MANAGING
PERMANENT
ESTABLISHMENT RISK
PwC Belgiums video regarding to the
Permanent Establishment, and its risks.

https://www.youtube.com/watch?v=VGuBbE
MflZU

PWC - TRANSFER
PRICING
The basic purpose of the Transfer
Pricing law is to make sure that the
transaction between related parties is
at arm's length price ('Market price').
Now that we have basic idea about TP,
discover what it means for you, what
happened in Luxembourg and more.

https://www.youtube.com/watch?v=IvXQ0Q
wbyII

We are Claudia Alexandra, Timothy Jevon and Denisha Muliasari for FEB UGM and Special
Thanks for the PwC and Deloitte for the valuable insights given.

THE END
Thanks a lot for the attention that has been
given to our Presentation