Indonesian Global Minimum Taxation

International taxation is undergoing a massive paradigm shift. With the introduction of the Global Minimum Tax (GMT), the era of tax competition via low rates is concluding. Indonesia, through a strengthened legal framework, is committed to ensuring that large multinational enterprises (MNEs) pay their fair share of tax to protect the national tax base.

1. What is Global Minimum Taxation (GloBE)?

Global Anti-Base Erosion (GloBE), or more commonly known as the Global Minimum Tax (Pillar Two), is an initiative led by the OECD and G20. Its primary objective is to establish a minimum effective tax rate of 15% for multinational enterprises (MNEs) with annual consolidated revenues of at least €750 million.

This system is designed to stop the race to the bottom phenomenon—where countries lower their tax rates to attract investors. Under GloBE, if a multinational company pays tax below 15% in a country (due to incentives or low rates), the company's home country has the right to collect a top-up tax to achieve an effective rate of 15%.

2. Strategic Implementation of GMT in Indonesia

Based on recent regulatory developments, Indonesia’s strategic steps include:

• Domestic Legislation: Adopting standards through Law No. 7 of 2021 (UU HPP), PP 55/2022, and further specified by PMK 136/2024 regarding the implementation of the global minimum top-up tax.
• Administrative Readiness: Developing information system infrastructure to manage the Income Inclusion Rule (IIR) and the Undertaxed Payments Rule (UTPR).
• Compliance Implementation: Under PMK 136/2024, MNEs are required to report their Effective Tax Rate (ETR) and submit GloBE information reports in phases for those meeting the consolidated gross turnover threshold.
• Safe Harbor Integration: Adopting the latest OECD administrative guidance (including the Side-by-Side Package) to simplify compliance starting January 1, 2026.

3. Steps to Calculate GloBE (GMT) Step-by-Step

1. Identify MNE Group: Define constituent entities within the consolidation scope (>€750M).
2. GloBE Income/Loss: Adjust commercial accounting profit to the GloBE profit base.
3. Adjusted Covered Taxes: Total taxes paid (including deferred tax adjustments).
4. Calculate ETR: Divide covered taxes by net GloBE income (ETR = Adjusted Covered Taxes / GloBE Income).
5. Calculate Top-up Tax: If ETR < 15%, multiply the difference by profit after Substance-based Income Exclusion.
6. Allocate Tax: Determine taxing rights via QDMTT, IIR, or UTPR.

4. OECD Side-by-Side (SbS) Package 2026

The Side-by-Side Package is an administrative bridge allowing qualifying tax systems (e.g., U.S. GILTI) to operate alongside GloBE. Under the Side-by-Side Safe Harbor mechanism, if the ultimate parent entity is in an approved jurisdiction, the IIR and UTPR top-up taxes are deemed zero.

5. Impact of GMT on Tax Incentive Policies in Indonesia

The implementation of GMT has a significant impact on the effectiveness of fiscal incentives previously offered by Indonesia:

• Neutralization of Tax Holidays: If Indonesia grants a 0% rate, but the company originates from a GMT-implementing jurisdiction, the 15% difference will be collected by the home country. This causes Indonesia's tax incentives to lose their appeal as the taxes "saved" in Indonesia are instead paid abroad.
• Shift in Priorities: The government must ensure that any incentive granted does not drop the ETR below 15% so that the taxing rights remain in Indonesia.

6. Tax Incentive Schemes in the GMT Era

To remain competitive, Indonesia is shifting toward GloBE-compliant incentive schemes:

• Qualified Refundable Tax Credits (QRTC): Providing tax credits that can be refunded in cash. Under GloBE rules, QRTCs are treated as income (not a tax reduction), ensuring the ETR remains at a safe level.
• Expenditure-based Incentives: Focusing on Super Tax Deductions for R&D and vocational training. These incentives reduce operational costs without drastically damaging the effective tax rate profile.
• Qualified Domestic Minimum Top-up Tax (QDMTT): Indonesia implements QDMTT so that top-up taxes from MNEs operating here stay within the Indonesian national treasury, rather than being ceded to the company's home country.