Protecting Domestic Growth through the Global Minimum Tax

For decades, countries have competed to attract foreign investment by lowering corporate taxes, triggering a global “race to the bottom.” The Global Minimum Tax (GMT), part of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Pillar Two, aims to reset this trajectory. Under this framework, Multinational Enterprises (MNE) groups with consolidated annual revenue of at least EUR 750 million are required to pay a minimum Effective Tax Rate (ETR) of 15% in every jurisdiction where they operate. This measure reduces incentives for profit-shifting to low-tax jurisdiction and promotes more level playing field for global taxation.

For Indonesia, adopting the GMT represents not merely compliance, but a strategic defense of its tax sovereignity. Without such mechanism, profits earned by MNEs in Indonesia could be taxed abroad, particularly in the parent entity’s jurisdictions. By implementing GMT, Indonesia ensures that domestic economic activities contribute directly to its fiscal revenue and national development, rather than enriching foreign treasuries.

Qualified Domestic Minimum Top-up Tax

Within the GMT framework, the Qualified Domestic Minimum Top-up Tax (QDMTT) serves as a safeguard to Indonesia’s taxing rights. It allows tax authorities to impose a top-up tax when a company’s effective tax rate falls below the 15% threshold. This way, QDMTT ensures that the additional revenue remains in Indonesia rather than flowing abroad.

Income Inclusion Rule

The Income Inclusion Rule (IIR) grants the jurisdiction of the parent company the right to impose additional taxes on profits earned by its subsidiaries in low-tax jurisdictions. This discourages profit-shifting to tax havens and reinforces the principle that corporate profits should be taxed where economic activity and value creation occur.

For Indonesia, the interaction between IIR and QDMTT is particularly crucial. Without a qualified domestic top-up mechanism, profits generated locally could be taxed abroad under the IIR, reducing Indonesia’s share of global tax revenue. Implementing an effective QDMTT thus allows Indonesia to retain taxing priority and preserve domestic fiscal benefits, while maintaining concistency with the OECD’s global coordination framework.

Undertaxed Payments Rule

The Undertaxed Payments Rule (UTPR) serves as the final layer of protection in the GMT framework. It allows other jurisdictions within a multinational group to apply top-up taxes if certain entities fail to meet the GMT. Essentially, UTPR ensures that no portion of global profits goes untaxed.

For Indonesia, UTPR underscores the importance of establishing clear and consistent domestic implementation. Without an effective QDMTT, Indonesia risks losing taxing rights over MNEs operating domestically, as untaxed profits could be captured abroad through UTPR.

Subject to Tax Rule

Beyond the GloBE rules, Pillar Two also introduces the Subject to Tax Rule (STTR). This provision allows source countries to impose a minimum 9% tax on cross-border payments, such as interest, royalties, and service fees, when these payments face low taxation in the recipient jurisdiction. STTR complements GMT by targeting profit-shifting through intra-group payments, helping countries like Indonesia retain their fair share of taxes.

Through the GMT, Indonesia strengthens its taxing rights while reinforcing its commitment to a fair and balanced global economy. By ensuring that profits earned within its borders contribute to national growth and fiscal resilience, Indonesia affirms its determination to build a more equitable and sustainable future in the evolving landscape of global taxation. (Shintya)