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ABSTRACT:

Transfer pricing is a crucial aspect of international business, especially for natural resource companies in Indonesia. It involves monitoring compliance with tax regulations, managing long-term risks, given the complexity and high value of the commodities they handle. The purpose of this study is to examine and analyse the direct effect of bonus mechanism and tunneling incentive on transfer pricing decision. While the indirect effect of this study, by placing tax minimisation as a mediating variable to explain the effect of bonus mechanism and tunneling incentive on transfer pricing decision. The data used in this study comes from the Annual Report of natural resource sector companies listed on IDX during the 2020-2022 period. Total of 185 companies using purposive sampling method, resulting in a sample of 132 data analysed using WarpPLS 8.0. The results showed that bonus mechanism and tax minimsation has no significant relationship with transfer pricing, while Tunneling incentive has significant affect transfer pricing. There is a significant relationship between bonus mechanism and tunneling incentive with tax minimisation practices. However, the mediating variable of tax minimisation can not explain the relationship between bonus mechanism and tunneling incentive with transfer pricing. The practical implication of this study is that aggressive transfer pricing practices must be balanced with compliance with tax regulations to avoid long-term risks such as fines and sanctions. This encourages companies to evaluate and adjust the design of incentives and internal controls, and implement strict regulations with independent internal audit and external auditor oversight to prevent harmful tunnelling practices.

KEYWORDS:

transfer pricing, bonus mechanism, tunneling incentive, tax minimisation.

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