In our previous article, we explored the scope of the Global Anti-Base Erosion Model Rules (GloBE) as outlined in Minister of Finance Regulation (Peraturan Menteri Keuangan / PMK) Number 136 of 2024 on the imposition of a global minimum tax under international agreements. In this article, we will delve into the GloBE provisions, the Permanent Establishment (PE) concept, and the Effective Tax Rate (ETR) determination.
Article 4 Section 1 of PMK Number 136 of 2024 specifies that Indonesia's global minimum tax provisions apply to resident taxpayers and PEs that are members of a Multinational Enterprise (MNE) group or constituent entity operating in Indonesia. This means non-resident taxpayers without a PE in Indonesia are not subject to these provisions. However, it's important to consider whether there is an expansion in the definition of PE.
Permanent Establishment
Article 4 Section 2 of PMK 136 of 2024 regulates the definition of PE within the context of GloBE. The provisions define PE in four main terms:
- a place of business, including any place considered as such, located in a country or jurisdiction and treated as a PE under the applicable Tax Treaty, provided the country or jurisdiction imposes taxes on income attributable to the PE;
- a place of business, including any place considered as such, in a country or jurisdiction that imposes taxes under domestic law on the income attributable to that place of business, similar to how the country or jurisdiction taxes its taxpayers, in the absence of a Tax Treaty;
- a place of business, including any place considered as such, located in a country or jurisdiction and treated as a PE, provided the country or jurisdiction has the right to impose taxes on income derived from the place of business, if the jurisdiction does not have a corporate income tax system; or
- a place of business or any place considered as such that has not been described in the previous points, with operational activities carried out outside the country or jurisdiction where the entity is located, if the country or jurisdiction excludes income attributable to such operational activities.
This broad definition of PE contrasts with the Income Tax Law, which defines PE as a form of business used by non-resident individuals in Indonesia for less than 183 days in 12 months and entities not established nor domiciled in Indonesia to conduct business activities. These activities can include:
- management offices;
- branch offices;
- representative offices;
- office buildings;
- factories;
- auto repair shops;
- warehouses;
- sales and promotional spaces;
- mining and extraction of natural resources;
- oil and gas mining areas;
- fisheries, animal husbandry, agriculture, plantations, or forestry;
- construction, installation, or assembly projects;
- provision of services by employees or other individuals for more than 60 days within 12 months;
- individuals or entities acting as agents in a non-independent capacity;
- agents or employees of insurance companies not established nor domiciled in Indonesia who receive insurance premiums or bear risks in Indonesia; and
- computers, electronic agents, or automated equipment owned, leased, or used by
digital transaction management to conduct business activities via the internet.
ETR Determination
GloBE imposes top-up taxes on MNE members whose ETR is lower than the minimum tax rate agreed upon by OECD members, which is 15%. To understand top-up taxes, we first need to grasp the ETR definition.
Article 1 of PMK 136 of 2024 explains that the ETR is the amount of the adjusted covered tax from each constituent entity (MNE member) in a country or jurisdiction divided by the GloBE net profit of that country or jurisdiction for a fiscal year.
The ETR of a constituent entity is calculated using the following formula:
Where:
To calculate the ETR, the adjusted covered tax includes:
- investment entities and insurance investment entities;
- constituent entities with ownership interests held by the Ultimate Parent Entity (UPE) at most 30%, but the UPE has a controlling interest; and
- constituent entities not taxed in any country (stateless constituent entities) and managed separately from other group entities.
The calculation example is as follows:
Consider XYZ Co, the UPE of an MNE Group in Country A, with constituent entities in Country B: PT X, PT Y, and PT Z. Assuming:
- PT X has a GloBE profit of EUR 1,000 and an adjusted covered tax of EUR 220;
- PT Y has a GloBE profit of EUR 500 and an adjusted covered tax of 0; and
- PT Z has a GloBE profit of EUR 1,000 and an adjusted covered tax of EUR 120.
Under the provisions, constituent entities of a group need to calculate the ETR per country. The ETR in Country B is calculated as follows:
In another example, DEF Co, the UPE of an MNE Group in Country D, has constituent entities in Country E: PT D, PT E, and PT F. Assuming the adjusted covered tax of the three constituent entities in Country E is 0, and the GloBE profits are:
- PT D has a GloBE profit of EUR 1,000
- PT E has a GloBE loss of EUR 2,000
- PT F has a GloBE profit of EUR 500
The amount of GloBE Net Loss for country E is EUR 500 (EUR 1,000 - EUR 2,000+ EUR 500). If there is no possibility of top-up taxes determined based on Article 31 Section 1, the ETR for that country does not need to be calculated.
