Inconsistency of Government Policy in the Provision of Tax Facilities and the Implementation of the Global Minimum Tax

The government has just issued provisions regarding taxation facilities in Nusantara Capital City, or Ibu Kota Nusantara (IKN). Through Minister of Finance Regulation No. 28 of 2024, the government considers it necessary to provide technical arrangements for Government Regulation No. 12 of 2023 concerning Ease of Doing Business and Investment Facilities for Business Actors in Nusantara Capital City.

In general, there are three types of government facilities provided for taxpayers doing business in Nusantara Capital City, namely income tax facilities, value-added tax facilities, sales tax on luxury goods, and customs facilities.

There are nine types of income tax facilities provided by the government in the new capital city of Indonesia, including:

• Reduction of corporate income tax for domestic taxpayers; 
• income tax on financial sector activities in the Financial Center; 
• reduction of corporate income tax on the establishment and or relocation of head office and or regional office; 
• deduction of gross income for the organization of fieldwork practices, apprenticeships, and so on; 
• gross income deduction for specific research and development activities; 
• deduction of gross income for donations and costs for the construction of public facilities;
• Income Tax Article 21 is covered by the government and is final.
• 0% final income tax on income from specific business gross turnover in micro, small, and medium enterprises;
• income tax deduction on the transfer of land and building rights. 

In addition, the value-added tax facilities provided by the government in Nusantara Capital City include VAT not collected and the exclusion of STLG on the delivery of certain taxable goods.

Note that the VAT facility is not collected as referred to in PMK 28/2024 and is given to the delivery of certain strategic taxable goods or services and also the import of certain strategic taxable goods.

As for what is meant by certain strategic taxable goods, among others, they include new buildings, domestically produced electric vehicles, and strategic taxable goods needed in the context of the preparation, construction, relocation, and development of Nusantara Capital City.

Furthermore, PMK 28/2014 also stipulates that there are three taxable services on which value-added tax is not collected, including rental services for landed houses, flats, offices, shops, and warehouses to persons or entities on duty or domiciled in the Nusantara Capital City, construction services for the development of Nusantara Capital City, and waste treatment services for waste or garbage generated by Nusantara Capital City.

Regarding customs facilities, PMK 28/2024 stipulates three customs facilities provided by the government to support the development and construction of the Nusantara Capital City, including exemption from Import Duty and Import Framework Tax or Pajak Dalam Rangka Impor (PDRI) facilities for imports made by local governments aimed at public interests in the Nusantara Capital City, exemption from Import Duty and PDRI on imports of capital goods for the construction and development of industry in the Nusantara Capital City and exemption from import duties on imports of goods and materials for the construction and development of industry in the Nusantara Capital City. 

Exemption from import duties and taxes in the context of importing capital goods and materials for the development and construction of the Nusantara Capital City is given primarily to strategic business fields, including:

• Construction of power plants, including renewable energy
• Construction and operation of toll roads
• Construction and operation of seaports
• Construction and operation of airports
• Development and provision of clean water

Furthermore, PMK 28/2024 also stipulates that the import duty exemption facility as above can be provided for up to 45 years.

Based on the description above, we can see that the government provides generous tax and customs facilities for the development of the Nusantara Capital City and its supporting areas. The provision of these facilities includes tax reductions or exemptions for several activities for a relatively long period.

On the other hand, the government is working on rules regarding the Global Minimum Tax as part of pillar II of the Global Anti-Base Erosion (Globe) implementation. The government, together with 138 other countries worldwide, is committed to applying a global minimum tax of 15% to multinational companies starting in 2024 (CNBC 2023).

Note that the global minimum tax is the minimum tax that companies operating in many countries (multinational enterprises) must pay to the country of domicile 15% if their global income exceeds 750 billion euros, or the equivalent of 12.7 trillion rupiah (OECD 2021).

The primary purpose of implementing a global minimum tax is to avoid harmful tax avoidance by multinational companies because of digitalization. In addition, another goal of implementing a global minimum tax is to prevent tax incentive wars to attract investment. 

However, the provision of tax incentives for the construction and development of the Nusantara Capital City, as referred to in PP 12/2023 and PMK 28/2024, has harmed the global goal of implementing the minimum tax. In addition, the implementation of PMK 28/2024 also shows the government's lack of seriousness and inconsistency in implementing the global agreement.

To avoid the negative stigma of government inconsistency while still attracting foreign investment, there are basic steps that the government can take. One of them is to replace tax incentives with other capital-intensive incentives. For example, for investors who invest in the Nusantara Capital City, the government will provide land facilities with Built Operate Transfer (BOT) or Public Private Partnership (PPP) schemes.