Introduction
At the outset, we invoke the disclaimer that this is not intended to be legal advice. The paper and its conclusions are offered only as a tool to help navigate these decisions. Interested readers who wish to explore the topic more deeply and based on specific circumstances should contact the authors directly.
A tariff is essentially a tax on imported goods, paid by the importer to the government of the importing country. Because tariffs are typically calculated as a percentage of the declared import value, they directly increase the cost of bringing goods across the border. Executives trying to mitigate the impact of tariffs while minimizing price increases may have a ‘Eureka’ moment: let’s just reduce the value of our imports on all intermediate goods we import. Under the company’s immediate control are the prices charged among affiliates internally before any sales to others.
This paper looks at a scenario whereby executives consider reducing the price of inter-affiliate transfers between countries by adjusting valuations and shifting profit margins to minimize tariff and global tax exposure. The threshold question in adjusting transfer prices to achieve lower tariff exposure would first be dictated by the algebra between country pairs based on the tariff level one wishes to reduce or avoid, and the relative corporate income tax rates between the pair. For instance, if reducing the transfer price saved $100 but resulted in paying $110 more in income tax due to shifting profit to a higher-tax importing country, this approach would result in a net loss which would make no sense. In our hypothetical analysis, the option of shifting the cost burden to the affiliate would only be “in the black” when that profit shift toward a trading country affiliate lowers the total outlay for income tax for the pair of companies on each side of the transaction. The driving force enabling this potential tax benefit is the significant difference in income tax rates between the trading partners.
Currently, both Indonesia and the United States (“US”) have similar levels of marginal corporate income taxation, both near 20%.[1] For altering transfer prices to become an economically attractive option solely based on tax savings, the difference in income tax rates would need to rise. This is an ever-present prospect and feature of politics in all countries. We use a hypothetical case between Indonesia and the US to illustrate how this might work operationally and why it is a myopic and risky strategy overall.
Factual Context
Bilateral Trade in Goods
The US and Indonesia enjoy robust two-way trade. The US is one of Indonesia’s top export destinations, with Indonesia recording about US$ 26.3 billion in exports to the US in 2024.[2] This resulted in a $16.8 billion trade surplus with the US that year.[3] Major Indonesian exports to the American market include electronics, apparel and textiles, footwear, and other manufactured goods.[4] The US and Indonesia hold regular meetings under their 1996 bilateral Trade and Investment Framework Agreement (TIFA), collaborating to resolve bilateral matters and coordinate on regional and multilateral issues. In January 2025, Indonesia recorded a total export value of approximately $2.64 billion to the US, while its imports from the US reached around $825 million. This trade activity resulted in a significant positive trade balance for Indonesia, amounting to $1.82 billion, underscoring the strong surplus Indonesia enjoys in its trade relationship with the US.
When comparing trade performance between January 2024 and January 2025, there was a notable increase in both exports and imports. Indonesia’s exports to the US rose substantially by $559 million, representing a growth rate of about 26.8%.[5] This surge reflects Indonesia’s expanding market presence and competitiveness in supplying goods to the US market, driven by strong demand for key export products such as palm oil, footwear, and cocoa-based items. Meanwhile, Indonesia’s imports from the US also experienced growth, albeit at a more moderate pace. Imports increased by approximately $37.4 million, or 4.75%, rising from $787 million in January 2024 to $825 million in January 2025. The growth in imports, mainly composed of petroleum products, crude oil, and chemical inputs, indicates Indonesia’s continued reliance on US goods to support its industrial, energy, and manufacturing sectors. Overall, these figures highlight the deepening trade ties between Indonesia and the US, with Indonesia maintaining a strong export advantage while also benefiting from a steady inflow of essential goods and resources from the American market.
The US–Indonesia Trade Landscape
Indonesia currently maintains a trade surplus with the US, which has made the nation’s exports a target for US tariff escalation amid its global trade war policy. In 2023, Indonesia’s exports to the US reached over USD 25 billion, with top sectors including textiles, rubber, electrical components, footwear, and seafood—sectors that are labor-intensive and crucial for national employment.[6]
In April 2025, the US announced sweeping new tariffs of 32% on many imports from Indonesia (among other countries), dramatically raising the costs of Indonesian goods entering the US. This move, described by US officials as a response to trade imbalance and other concerns, created an urgent challenge for Indonesian exporters. A 32% duty could price many products out of the US market, unless companies either absorb the cost, raise US consumer prices, or find cost savings elsewhere. Particularly for textile and garment products, the tariff even reached up to 47%.
Indonesia’s approach to the negotiations is pragmatic and strategic, an approach that underscores the high stakes. Rather than reflexively retaliating with its tariffs, Indonesia has so far chosen a diplomatic approach. Indonesia has sent a high-level delegation to Washington, DC offering proposals to significantly increase Indonesia’s imports of US goods (by up to $18-19 billion) and even Indonesian state-company investments in US industries. The Indonesian government, led by the Coordinating Ministry for Economic Affairs, is negotiating a new bilateral framework expected to be finalized in the second quarter of 2025. Indonesia is proactively offering to increase imports from the US to reduce the surplus and avoid tariff hikes.[7] Key areas of increased import commitments include:[8]
- Energy: Importing more US LPG and crude oil, already the largest import category from the US at USD 2.9 billion in 2024.
- Agriculture: Procurement of soybeans and wheat, worth USD 1.25 billion in 2024.
- Industrial Equipment: Including aircraft engines and potentially military systems, worth USD 1.5 billion.
- Non-Tariff Incentives: Regulatory reforms to ease US investment in sectors such as oil & gas and financial services, including amendments to domestic content requirements (TKDN).
In return for the delivered proposal, Indonesia is also seeking concessions, namely:[9]
- Tariff Reductions: Pressing the US to apply more competitive tariffs to Indonesian exports, especially when compared to ASEAN peers.
- Investment Incentives: Seeking greater US investment in Indonesia’s downstream mineral processing industry and STEM education, aligning with the Indonesia national development agenda.
- Regulatory Certainty: Indonesia is offering to streamline regulatory procedures and improve the business environment for US investors through policy clarity and targeted tax reform.
Optimizing Tariff Impact by Altering Inter-Affiliate Prices: The Temptation and the Trap
Indonesian subsidiaries of multinational corporations often rely on intermediate goods from their US parent or sister companies. Common mechanisms include structuring transactions through regional procurement hubs or trading subsidiaries, adjusting the invoice price of goods sold between an Indonesian entity and its foreign affiliate, charging royalties or management fees within the corporate group, or extending intercompany loans at specific rates. Each of these tools can shift where profits are reported within the group. For example, aircraft parts, chemical components, or specialized machinery are imported under internal pricing arrangements. Faced with rising tariffs, Indonesian managers might consider adjusting these prices downward to reduce customs duties—an internal accounting shift that may appear harmless but constitutes a risky tax avoidance practice under transfer pricing laws.
In sectors like garments and seafood, where tariffs are projected to rise from 10–37% to 20–47%, the cost pressure is acute.[10] Executives may model tariff exposure under various pricing scenarios. If a component is imported at USD 100/kg and faces a 30% tariff, a downward revaluation to USD 85/kg could save USD 4.5/kg in duties.[11]
However, without sound cost justification, such moves raise red flags with Indonesian customs and tax authorities, particularly as both agencies now share transfer pricing data under the Joint Audit Initiative. For local firms, the reputational risk may be even greater, as it reflects poorly on Indonesia’s transparency commitments during trade talks. Also from the US side, the US Department of Justice Criminal Division recently has released their priority dated May 12, 2025 to combat white-collar crimes in the high-impact areas, such as trade and customs fraud, including tariff evasion.
Legal Landscape: One System, Two Countries
Businesses must navigate tariffs and transfer pricing within a framework of overlapping legal regimes. Key among these are Indonesia’s trade and tax laws, international guidelines, and even financial reporting standards. For what it is worth, going forward, both Indonesia and the US are members of the World Trade Organization (WTO) and its treaty obligations. While many of the recent actions of different government signatories raise questions about the vigor of the WTO, foundational concepts and fundamental rules over how to value goods crossing national boundaries for customs purposes appear to be intact. Beyond that, both countries also subscribe to bilateral tax agreements that spell out how to value intermediate goods, how to avoid double taxation, and also how to ensure consistency and accuracy in accounting for inter-affiliate transfers.
First, the procedures to properly value goods for customs purposes are spelled out in WTO Guidelines that go back to the days of the General Agreement on Tariffs and Trade (GATT, the WTO Predecessor). The rules on Customs Valuation can be found in the “The Agreement On Implementation Of Article VII Of The General Agreement On Tariffs And Trade 1994.”[12] These rules provide alternative means of valuing the goods in trade, but all are based on the principle of establishing a value to an independent third party based on prices in the destination market for similar situated goods. The methods explicitly exclude import nation tariffs or duties as inherent to the value of the goods and disallow its inclusion in the calculation.[13]
Similarly, the philosophy of valuing intermediate goods sold between affiliates (transfer prices) is based on an objective measure of value, such as similar goods sales to third parties. In the US, these rules and procedures are in the US Code at 26 U.S.C. § 482, and its corresponding regulations, 26 CFR §1.6662-6.[14] The Regulation states:
The taxpayer‘s selection and application of a specified method is reasonable only if, given the available data and the applicable pricing methods, the taxpayer reasonably concluded that the method (and its application of that method) provided the most reliable measure of an arm’s length result under the principles of the best method rule of § 1.482-1(c). A taxpayer can reasonably conclude that a specified method provided the most reliable measure of an arm’s length result only if it has made a reasonable effort to evaluate the potential applicability of the other specified methods in a manner consistent with the principles of the best method rule.[15]
These rules spell out the requirements, the documentation support required, and the penalties for non-compliance. The rules are further supported by accounting guidelines in the Generally Accepted Accounting Principles (GAAP) or their International Financial Reporting Standards (IFRS). Finally, coordination between taxing authorities occurs via bilateral treaties requiring the exchange of information and filings for taxpayers whose activities cross jurisdictional boundaries, with the intent of detecting and penalizing those who fail to comply.[16]
Indonesia, as a WTO member, follows the international custom valuation hierarchy to determine the dutiable value of imports. At the legislative level, two key laws form the foundation of Indonesia’s trade regime. The Customs Law, specifically Law No. 17 of 2006 (an amendment to Law No. 10 of 1995), regulates the entry and exit of goods across Indonesia’s customs territory. It covers essential aspects such as customs procedures, tariff obligations, and enforcement measures. Additionally, the Trade Law (Law No. 7 of 2014 jo. Law No. 6 of 2023 on Enaction of Government Regulation in Lieu of Act No. 2 of 2022 On Job Creation into Act) provides a broader framework for domestic and international trade, addressing export-import licensing requirements, prohibitions, and restrictions on specific goods. Further detailed provisions are outlined in government regulations, including Presidential Regulation No. 10 of 2021 jo. Presidential Regulation No. 49 of 2021 on Investment Business Sectors, which specifies the fields of business activities that are open or closed to foreign and domestic investment, including aspects related to the import and export sectors.
Ministerial regulations, particularly those issued by the Ministry of Trade, play a crucial role in operationalizing these laws. For instance, Minister of Trade Regulation No. 36 of 2023 sets out policies and procedures for import activities, including the obligation to obtain an Importer Identification Number (API) and technical recommendations from relevant ministries or agencies. Specific products, such as coal, crude palm oil, and certain minerals, also require special export permits and may be subject to export duties under designated regulations.
Companies involved in international trade in Indonesia shall secure several critical licenses and registrations. They must obtain a Business Identification Number (NIB) through the Online Single Submission (OSS) system, and depending on their business activities, an Importer Identification Number (API-U or API-P) for general trading or production purposes, respectively. Every import and export transaction must also be documented through Import Declarations (PIB) and Export Declarations (PEB), which are submitted to the Directorate General of Customs and Excise. Moreover, Indonesia enforces prohibitions and restrictions on certain goods. Items such as hazardous materials, endangered species, cultural artefacts, and controlled chemicals are either banned or require special import/export approvals to move across borders legally.
Multinational companies shall navigate an existing legal landscape when engaging in inter-affiliate trade and transfer pricing adjustments. In addition to the Customs Law, here are several other key legal and regulatory frameworks on transfer pricing:
- Minister of Finance Regulation No. 172/2023: Regulates the application of the arm’s length principle in transactions affected by special relationships (affiliated transactions), in order to prevent tax avoidance through transfer pricing.
- Indonesian Tax Authority Regulation PER-22/PJ/2013: This regulation mandates comprehensive documentation for related-party transactions. It outlines acceptable pricing methods (e.g., CUP, Resale Price, Cost Plus) and requires MNEs to maintain contemporaneous transfer pricing documentation. Non-compliance can lead to income adjustments and interest penalties.
- OECD Transfer Pricing Guidelines (2022): These internationally accepted standards require that transfer prices between affiliated entities follow the arm’s length principle, i.e., be consistent with prices charged between unrelated parties under comparable circumstances. Deviation from this standard increases the risk of tax adjustments and penalties across jurisdictions. Indonesia has adopted these guidelines as a reference because there are no regulations like those in Indonesian regulations.
Analysis
Legal frameworks strictly limit the extent to which companies can manipulate import valuations. To remain compliant and avoid triggering tax audits, financial restatements, or legal penalties, firms must provide solid economic justifications and maintain thorough documentation. While manipulating import values may offer short-term cost reductions, it also significantly increases the risk of tax audits and penalties for violating arm’s length principles-risks highlighted in regulations such as Indonesia’s Minister of Finance Regulation No. 172/2023 and the US 26 CFR §16662-6. Given these regulatory constraints, companies must carefully weigh the potential benefits against the substantial risks before attempting any pricing strategies aimed at reducing tariffs. In addition, the strategy will likely result in additional burden due to the compliance requirements including the need for robust documentation, detailed functional and comparability analyses required to meet the arm’s length standard and defend against tax authorities potential security.
At first glance, lowering transfer prices to decrease declared import values might seem like a straightforward way to minimize costs. Executives may view this as a simple calculation: reducing the import value lowers both customs duties and the taxable income of the importing subsidiary. For instance, a 10% reduction in declared value across large volumes can generate immediate cash savings. However, this approach carries complex implications.
Reducing import prices decreases the cost of goods sold for the importing affiliate, which in turn lowers local profitability and corporate income tax obligations, particularly attractive outcomes in high-tax jurisdictions like Indonesia. Conversely, this increases the gross margin and taxable income of the parent company or final assembler, especially if they are based in a lower-tax country. While this may improve the group’s overall tax position, it also heightens the risk of scrutiny from tax authorities in both jurisdictions.
Furthermore, international rules on customs valuation-adopted by all WTO member countries-prohibit including import duties in the value of goods. Even if trade terms are changed from the typical FOB (Free On Board) or CIF (Cost, Insurance, and Freight) to DDP (Delivered Duty Paid) or DAP (Delivered at Place), customs and tax authorities are unlikely to accept these as valid reasons for altering transfer prices. Even if a company can present legitimate reasons for lowering the value, such as reduced market power due to tariffs, the burden of proof remains with the importer, who must be prepared to defend their position with robust documentation.
The challenge is further complicated by the need for consistent arguments before both customs and tax authorities in different countries. Convincing customs valuation review boards is only the first step; the same rationale must also withstand scrutiny from tax authorities on both sides of the transaction. Lowering declared import prices also reduces the customs duty base and, in countries where VAT is collected at the border, can decrease VAT liabilities. However, this creates compliance risks. In jurisdictions where VAT deductions depend on accurate invoicing, underreporting can result in denied input credits and potential double taxation.
Ultimately, these practices operate in a legal gray area. Without strong documentation and defensible transfer pricing analyses-grounded in functional and comparability studies-tax authorities may recharacterize transactions, impose adjustments, and levy penalties. Transfer pricing audits, especially those spanning multiple jurisdictions, can result in significant financial and reputational damage that far outweighs any short-term gains. On a broader scale, such strategies erode the tax base in developing countries like Indonesia, undermining fiscal sovereignty and domestic revenue collection. At the macroeconomic level, they distort trade statistics and may provoke retaliatory measures from trade partners, increasing global economic uncertainty.
Beyond Tariff Avoidance
The Indonesian sectors most at risk from US tariffs—textiles, footwear, and aquaculture—are major employment hubs. As a result, the Indonesian government is forming a “layoff” (PHK) task force and drafting a stimulus package to support domestic producers. However, such measures, while helpful, are reactive. Indonesia must also broaden its trade diversification strategy. Strengthening trade relations with BRICS nations and ASEAN neighbors can offer alternative markets, reduce US dependence, and give Indonesia stronger leverage in future trade disputes.
For Indonesian executives navigating the uncertain terrain of US protectionism, the temptation to adjust inter-affiliate transfer prices to avoid tariffs is understandable—but dangerously short-sighted. Not only does this risk violate Indonesian transfer pricing regulations and trigger audits, but it also undermines the country’s broader strategic goals in securing long-term, balanced trade relations.
Indonesia’s approach to the ongoing negotiations with the US—offering trade concessions in exchange for investment and tariff reform—is a prudent one. Still, it must be accompanied by structural policies that protect local industries, promote economic resilience, and ensure tax compliance.
In this context, executive decisions must align with national interests. Cost-saving measures should be grounded in operational efficiency, not accounting tricks. Strengthening internal transfer pricing compliance, investing in supply chain resilience, and participating in fair trade practices will position Indonesian firms to survive and thrive in an increasingly complex global economy.
From a long-term strategic perspective, reliance on aggressive transfer pricing undermines corporate agility. As global trade policies shift, firms may find themselves locked into rigid pricing frameworks that are difficult to unwind. Inconsistencies in pricing can also impair intra-group coordination, distort internal performance metrics, and reduce the transparency of financial reporting, ultimately weakening a company’s governance and decision-making capacity.
Strategic and Systemic Implications
In recent years, Indonesia’s export landscape has been shaped by escalating global trade tensions and shifting policies among major partners, particularly the US. Under President Donald Trump’s administration, the US adopted a protectionist “America First” trade agenda, introducing new tariffs and stricter import regulations. While Indonesia was not the primary focus, unlike China, several Indonesian products, including textiles, footwear, and rubber goods, became subject to heightened scrutiny and additional tariffs, notably under Section 301 of the US Trade Act 5. These measures, justified by the US as responses to perceived unfair trading practices, have compelled Indonesian exporters to comply with more complex customs and regulatory requirements to maintain access to the American market.
Strategically, reliance on transfer pricing as a mechanism to offset tariff exposure carries significant legal and operational risks. Firms that base supply chain decisions primarily on tax arbitrage may find themselves less agile in the face of sudden tariff changes, an acute challenge for industries such as electronics and textiles, which depend on just-in-time manufacturing and are vulnerable to policy volatility. Over time, aggressive transfer pricing can erode trust between multinational corporations and host governments. As tax authorities enhance cross-border audit capabilities and data sharing-particularly under the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, companies employing such strategies face increased risk of investigation, prolonged disputes, and reputational harm.
On a systemic level, widespread use of aggressive transfer pricing undermines the global consensus on fair taxation, disproportionately impacting developing countries like Indonesia by diminishing critical tax revenues needed for infrastructure and social progress. Distorted trade flows and misaligned macroeconomic data further complicate effective policy formulation. Moreover, these practices can provoke retaliatory trade measures, as countries affected by profit shifting may respond with unilateral tariffs, digital services taxes, or sanctions, thereby heightening geopolitical risk and market uncertainty.
Given these realities, companies should approach transfer pricing as a tariff avoidance tool with extreme caution. Building strategic resilience in this environment requires forward-looking tax governance that emphasizes transparency, regulatory compliance, and adaptability to evolving global norms.
Recommendations
In light of the complexities surrounding tariff mitigation through transfer pricing, this paper suggests that any such strategy be viewed with circumspection. Instead, the following recommendations are presented to guide multinational enterprises and policymakers:
- Acknowledge the True Nature of the Strategy: Intra-firm pricing adjustments do not eliminate tariff obligations but redistribute the financial and tax burdens across jurisdictions. Recognizing this helps avoid overestimating the benefits of such tactics.
- Focus on Supply Chain Resilience, Diversification of Markets and Suppliers. These operational tactics focus on firm competitiveness and resilience, not gimmicks.
- Develop Holistic, Cross-Jurisdictional Tax Models: MNEs should adopt integrated financial models that account for direct and indirect tax consequences, including VAT, withholding tax, and potential double taxation. This will enable informed decision-making and risk evaluation.
- Ensure Full Compliance with Transfer Pricing Rules: Documentation aligned with the OECD Transfer Pricing Guidelines and local regulations is crucial. Companies must justify their pricing strategies with robust functional analyses and benchmarking studies.
- Implement Adaptive Tax Governance: Tax strategies should be dynamic and capable of adjusting to changing tariff regimes, BEPS standards, and regulatory scrutiny. Establishing internal governance frameworks, such as tax control frameworks or centralized compliance protocols, can help maintain alignment with evolving legal expectations.
- Prioritize Transparency and Stakeholder Communication: Given increasing public interest in tax fairness, companies must prepare to explain their pricing structures to regulators, investors, and civil society. Proactive disclosure and engagement can help maintain reputational integrity.
- Invest in Local Capacity and Long-Term Partnerships: Rather than focusing solely on tax minimization, MNEs are encouraged to contribute to local economies through value creation, job generation, and tax contributions. This approach builds goodwill and mitigates the risk of retaliatory or discriminatory regulatory treatment.
- Coordinate with Policymakers to Improve Clarity and Certainty: Governments, including Indonesia’s, should strive for greater alignment with international standards while also improving administrative guidance on acceptable pricing practices. Public-private dialogue can foster an investment climate that balances tax integrity with commercial viability.
Ultimately, balancing cost optimization with regulatory compliance and ethical tax conduct is not only a strategic necessity—it is foundational to sustainable global business operations.
Written by: Dan Boyle, Felipe André Isoré Gutiérrez, R. Bayu Perdana, Muhamad Destianto, Ahmad Novindri Aji Sukma, Nadira Karisma Ramadanti, Nurdinah Hijrah, and Tsany A. Tsabitah
[1] Trading Economics, Indonesia Corporate Tax Rate, currently at 22% down from an all time high of 39% in 2002. For the United States, See Id., where the corporate marginal tax rate is currently at 21%, but averaged 39.1 % over the past 115 years, from a low of 1% in 1910 to as high as 52.8% in 1968. Available at www.tradingeconomics.com.
[2] Indonesia will not retaliate against Trump Tariff, official says. Reuters (2025) Indonesia will not retaliate against Trump tariff, official says; available at: https://www.reuters.com/world/indonesia-will-not-retaliate-against-trump-tariff-official-says-2025-04-06/ (Accessed: 15 May 2025).
[3] Id.
[4] Id.
[5] Indonesia (IDN) and United States (USA) trade, The Observatory of Economic Complexity; available at: https://oec.world/en/profile/bilateral-country/idn/partner/usa (Accessed: 15 May 2025).
[6] Indonesia exports to United STATES 2025 DATA 2026 forecast 1989-2023 historical, Indonesia Exports to United States – 2025 Data 2026 Forecast 1989-2023 Historical, Trading Economics. Available at: https://tradingeconomics.com/indonesia/exports/united-states (Accessed: 15 May 2025).
[7] Indonesia says to increase US imports, lower orders from other countries, Reuters. Available at: https://www.reuters.com/world/asia-pacific/indonesia-says-increase-us-imports-would-divert-orders-elsewhere-2025-04-18/ (Accessed: 15 May 2025).
[8] Indonesia to give VIP ‘red carpet’ for U.S. imports, Algo Research. Available at: https://algoresearch.id/insight/content/2025/04/21/indonesia-to-give-vip-red-carpet-for-u-s-imports (Accessed: 15 May 2025).
[9] Id.
[10] Id.
[11] Id.
[12] World Trade Organization (WTO), Agreement On Implementation Of Article VII Of The General Agreement On Tariffs And Trade 1994; available at https://www.wto.org/english/docs_e/legal_e/cv_e.htm#ann1.
[13] Id.
[14] Internal Revenue Service. 26 United States Code. §482, Allocation of Income and Deductions Among Taxpayers, and 26 CFR §1.6662-6, Transactions Between Persons Described in Section 482 and Net Section 482 Transfer Price Adjustments, available at https://www.law.cornell.edu/cfr/text/26/1.6662-6.
[15] 26 U.S.C. §1.6662-6.
[16] e.g., https://www.irs.gov/pub/irs-lbi/indonesia_competent_authority_arrangement_cbc.pdf, Inrtenal Revenue Service, Arrangement Between The Competent Authority Of The United States Of America And The Competent Authority Of The Republic Of Indonesia On The Exchange Of Country‐by‐Country Reports.
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