Pillar 2: Strategic Turning Point in Global Tax Reform
As profits flow freely across borders, the question of tax fairness becomes harder to ignore. In today’s interconnected global economy, multinational enterprises (MNEs) often shift their profits to countries with lower tax rates, known as tax havens. This growing imbalance led to the creation of the Base Erosion and Profit Shifting (BEPS) initiative, introduced by the OECD in collaboration with G20 countries. The BEPS initiative addresses how MNEs shift profits and reduce the tax base, which in turn widens revenue gaps and creates inequality between countries.
In response, the OECD and G20 rolled out BEPS 1.0, a framework of 15 key actions designed to address legal loopholes and reduce cross-border tax avoidance. Yet, the approach proved insufficient for the challenges posed by the digital economy. To tackle these challenges, BEPS 2.0, known as the Two-Pillar Solution, was introduced, bringing Pillar 1 and Pillar 2 into focus.
New Path of Global Tax Reform
Pillar 1 focuses on reallocating taxing rights to the countries where MNEs generate their income. This allows market countries to tax profits, especially from digital activities, even without a physical presence (Permanent Establishment). Still, Pillar 1 is navigating complex negotiations, which has slowed its implementation.
Pillar 2, on the other hand, has taken center stage as it provides a practical framework to ensure MNEs contribute a fair share of taxes worldwide. It is enforced through the Global Anti-Base Erosion (GloBE) Rules, which require a minimum Effective Tax Rate (ETR) of 15% for MNE groups with total consolidated revenue of at least 750 million euros.
The GloBE framework rests on three main components: the Income Inclusion Rule (IIR), the Undertaxed Payments Rule (UTPR), and the Qualified Domestic Minimum Top-up Tax (QDMTT). Together, these mechanisms ensure the Global Minimum Tax (GMT) is applied effectively. Beyond the GloBE Rules, Pillar 2 also introduces the Subject to Tax Rule (STTR), which allows source countries to impose a minimum 9% tax on certain payments, such as interest, royalties, and service fees that are taxed at low rates in the recipient jurisdiction.
Implications for Indonesia
The global agreement on a minimum tax rate has direct consequences for Indonesia, who has been part of the OECD Inclusive Framework since 2016 Implementing Pillar 2 shows the need for the country to recalibrate its fiscal policies to align with emerging principles of global tax fairness.
For years, Indonesia has relied on various fiscal incentives to attract investment, including tax holidays, mini tax holidays, tax allowances, and super tax deductions. With the introduction of the Global Minimum Tax, however, the space to offer these incentives is shrinking. Full tax holidays, which provide complete tax exemptions, could conflict with Pillar 2’s principle that every MNE should pay an effective tax rate of at least 15%.
This highlights the need for Indonesia to adjust its tax incentive policies carefully. The government must ensure that every fiscal facility offered continues to support investment without lowering the effective tax rate below the global threshold.
Overall, Pillar 2 marks a significant milestone in the global push for a fair, transparent, and sustainable tax system. By focusing on the GMT and mechanisms such as the STTR, the OECD and G20 aim to close gaps in cross-border tax avoidance while strengthening fiscal fairness among countries. This pillar lays a solid foundation before moving into the technical implementation phase of the GMT. (Shintya)