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Jakarta, Ideatax -- In the near future, the government will implement a global minimum tax which is a derivative of pillar two of the Global Anti Base Erosion (GloBE). Previously, the Government of Indonesia along with 138 other countries in the world has committed to implement the global minimum tax in 2024 (Nugroho, 2023). In fact, the Fiscal Policy Agency of the Ministry of Finance said that the government is currently preparing a draft regulation on the global minimum tax (DDTC News, 2023).
It can be simply explained that the global minimum tax is the minimum tax that must be paid by multinational enterprises (MNEs) that have income of more than 750 million Euros in one fiscal year or the equivalent of 12.7 trillion Rupiah (OECD, 2023). The agreed rate for the global minimum tax is 15% on profits earned by MNEs in each tax jurisdiction. Thus, if an MNE has an overall gross income of more than 750 million euros, then the MNE must pay a minimum tax of 15% of profits in the taxing jurisdiction where its goods or services are sold.
Also Read: Mitigation of Global Minimum Tax: A Perspective for Taxpayers
The emerging idea of global minimum tax is inseparable from the challenges faced by tax jurisdictions in the digital economy. In the era of digitalization, MNEs can conduct business activities anywhere and anytime without being limited by country barriers. Unfortunately, it is difficult for taxation authorities to prevent harmful tax avoidance through profit shifting on cross-border transactions. Thus, MNEs freely try to shift their profits in low-tariff countries. Therefore, in order to prevent profit shifting, the OECD published the BEPS Action Plan in 2013 which was later reduced to pillar two of the Global Anti Base Erosion (OECD, 2021).
In addition, one of the objectives of implementing a global minimum tax is to prevent tax incentive wars to attract investment. It must be recognized that fiscal incentives have a significant role in attracting FDI (Foreign Direct Investment). Various studies show that tax incentives in the form of tax holidays and tax allowances have a significant influence in attracting FDI in Indonesia. Sari et al (2015), for example, found that tax holidays have an impact on increasing investment activity in Indonesia. On the other hand, Pratiwi and Khoinurrofik (2023) argue that the effective tax rate has a significant impact on fixed asset investment. That is, the lower the effective tax rate, the higher the level of investment in fixed assets. However, unhealthy competition between jurisdictions in providing fiscal incentives makes MNEs easily shift their profits (race to the bottom).
The application of global minimum tax, on the one hand, will realize the fairness of taxation rights between the source country and the MNE domicile country. In addition, the implementation of global minimum tax also provides a glimmer of hope for market jurisdiction countries to increase their fiscal capacity through tax revenue. However, on the other hand, the emergence of global minimum tax has the potential to create new problems for Indonesia and other developing countries. The global minimum tax of 15% makes various fiscal incentives provided by the government to attract foreign investment in the form of tax allowance, tax holiday and super deduction tax ineffective.
There are at least two negative implications arising from the imposition of the global minimum tax. First, in the short term there will be capital outflows of foreign investments that have been invested in Indonesia. This is because the imposition of global minimum tax makes the effective income tax rate on investment in Indonesia uncompetitive. Second, in the short term, there will be a slowdown in new foreign direct investment in strategic and national-scale projects in Indonesia. The slowdown in new investment is certainly very detrimental to Indonesia. Moreover, the Indonesian government is currently aggressively boosting investment for the National Capital City or Ibu Kota Negara Nusantara (IKN).
Indonesia and other countries may refuse to implement the global minimum tax, but the consequences must be prepared to lose the right to tax MNEs operating in Indonesia. In addition, the rejection of the global minimum tax also has the potential to cause discrimination from other countries. Therefore, to implement a global minimum tax while still maintaining the investment climate, there are basically several things that the government can do.
First, the government can adopt the Qualified Domestic Minimum Tax (QDMT) in its domestic regulations. QDMT is a domestic tax mechanism that is in line with the provisions of the second global minimum tax pillar (OECD, 2023). Through QDMT, the government is required to apply the same treatment to MNEs and other taxpayers. The advantage is that the government will not lose tax potential if the effective tax rate is lower than 15%.
Second, the government can convert tax incentives into other forms of incentives. For example, the government can convert tax incentives into electricity, gas or labor subsidies. Converting tax incentives into other forms of incentives allows Indonesia to implement a global minimum tax while remaining attractive to investors.
The third alternative is that the government can continue to impose a global minimum tax of 15% but reuse the proceeds for the benefit of taxpayer investment by building port infrastructure, bonded zones and other special economic zones for instances. The use of tax revenue from the global minimum tax for infrastructure projects will not only attract investment but will also absorb domestic labor, which in turn will reduce unemployment and increase GDP.
References
DDTC News. (2023, Oktober 25). Implementasi Pajak Minimum Global, Peraturan Baru disusun. Retrieved from DDTC: https://news.ddtc.co.id/implementasi-pajak-minimum-global-peraturan-baru-disusun-1798075
Nugroho, R. A. (2023, August 23). RI Pajakin Google Cs di 2024, Nasib Tax Holiday Gimana Nih? Retrieved from CNBC: https://www.cnbcindonesia.com/news/20230811094807-4-462138/ri-pajakin-google-cs-di-2024-nasib-tax-holiday-gimana-nih
OECD. (2021, December 20). OECD releases Pillar Two model rules for domestic implementation of 15% global minimum tax. Retrieved from OECD: https://www.oecd.org/newsroom/oecd-releases-pillar-two-model-rules-for-domestic-implementation-of-15-percent-global-minimum-tax.htm
OECD. (2023). Minimum Tax Implementation Handbook (Pillar Two). Paris: OECD.
Pratiwi, Y. W., & Khoirunurrofik. (2023). The Effect of the Effective Corporate Tax Rate Toward Investment Decision in Indonesian Public Company. Journal Indonesian Applied Economics, 60-74.
Sari, N., Dewi, M. S., & Sun, Y. (2015). Indonesia: The Effect of Tax Holiday on Economic Growth Related to Foreign Investment. Elsevier, 1008-1015.
