For years, tax incentives have been one of the government’s tools for attracting investment. One of the best-known is the tax holiday, which provides qualifying companies with a reduction or exemption from corporate income tax.
However, that landscape has changed with the introduction of Pillar Two of the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Pillar Two introduces a 15% global minimum tax (GMT) for multinational enterprise (MNE) groups with consolidated revenue of at least EUR 750 million.
Indonesia has adopted these rules through Minister of Finance Regulation (Peraturan Menteri Keuangan/PMK) Number 136 of 2024 concerning the Implementation of the Global Minimum Tax Under International Agreements. The change directly affects how investment incentives are designed. Incentives that reduce an MNE’s effective tax rate (ETR) below 15% may give rise to a top-up tax.
In other words, governments need to reassess the benefits of tax-based incentives. For companies within the scope of Pillar Two, a corporate’s income tax exemption in Indonesia does not necessarily translate into an equivalent reduction in the group’s overall tax burden.
Tax Holiday
A tax holiday is a tax incentive that reduces corporate income tax for qualifying companies. It primarily supports economically significant investments, including developing pioneer industries, creating jobs, adopting technology, and strengthening domestic supply chains.
The legal basis for the relief is Article 18 of Law of the Republic of Indonesia Number 25 of 2007 concerning Capital Investment. PMK Number 130/PMK.010/2020, as amended by PMK Number 69 of 2024, sets out its implementing provisions.
The relief is not available to all companies. One main requirement is a new investment with a planned value of at least IDR 100 billion.
The company must also be an Indonesian legal entity engaged in a pioneer industry or meet certain quantitative criteria, and comply with applicable debt-to-equity ratio requirements.
Moreover, the company must begin realizing its investment plan no later than one year after the incentive decision is issued. Investments benefiting from the tax holiday are also generally barred from receiving certain other tax incentives specified under the regulations.
18 Pioneer Industries
One category eligible for the tax holiday comprises companies operating in pioneer industries. The regulations cover 18 business sectors, including upstream basic metal industries, oil and gas refining, basic chemicals, pharmaceutical raw materials, electronic components, machinery, robotics, motor vehicles, ships, railways, aircraft, pulp, economic infrastructure, and the digital economy.
These business activities are further linked to the Indonesian Standard Industrial Classification (Klasifikasi Baku Lapangan Usaha Indonesia/KBLI). Companies outside the 18 designated pioneer industries may still apply for the incentive through a quantitative assessment procedure.
The assessment considers several indicators, including the use of local raw materials, import substitution, investment location, employment, environmentally friendly technology, adoption of new technology, designation as a National Strategic Project, contribution to global supply chains, and infrastructure development. Taxpayers must score at least 80 points to meet the quantitative criteria.
The tax holiday amount depends on the planned investment value. For new investments of IDR 100 billion to less than IDR 500 billion, companies receive a 50% reduction in corporate income tax for five fiscal years, followed by a 25% reduction for two years.
Investments of IDR 500 billion to less than IDR 1 trillion may qualify for a 100% reduction for five years, followed by a 50% reduction for two years.
For larger investments, the main incentive period increases accordingly. Investments of IDR 1 trillion to less than IDR 5 trillion may receive the incentive for seven years, while investments of IDR 5 trillion to less than IDR 15 trillion may receive it for 10 years.
For investments of IDR 15 trillion to less than IDR 30 trillion, the main incentive period extends to 15 years. Investments of at least IDR 30 trillion may qualify for 20 years. After the main incentive period ends, a transition period is available, providing a 50% reduction in corporate income tax for two years for investments receiving a 100% reduction during the main period.
The incentive takes effect once the company begins commercial production, as shown by the first sale of its output or by using the output in a subsequent production process.
Tax Holiday Requirements
Companies benefiting from a tax holiday must continue to meet their investment commitments. The Directorate General of Taxes (DGT) may conduct a field inspection to verify the date of commercial production, the amount of investment realized, and whether the company’s activities correspond to its approved investment plan.
The incentive may be revoked if the company fails to meet the applicable requirements. For instance, realizing an investment of less than IDR 100 billion or conducting business activities that differ from the original plan.
Other grounds for revocation include using previously owned capital goods where prohibited, transferring specific assets during the incentive period, and relocating investments overseas.
Tax holiday recipients must also maintain separate bookkeeping for income derived from activities benefiting from the incentive and income from activities that do not qualify. This procedure allows the government to distinguish between incentive-eligible income and income subject to standard tax rules.
Tax Incentives
Tax incentives commonly reduce investment costs. A tax holiday, for instance, can eliminate corporate income tax for a specified period. Other incentives include tax allowances, super tax deductions, accelerated depreciation, and tax loss carryforwards.
Each instrument serves a different purpose. Some reduce tax liabilities, some defer tax payments, and others reduce the taxable base. The challenge is that not all investments respond to tax incentives in the same way.
Investments targeting the domestic market tend to be influenced more by factors such as market size, purchasing power, resource availability, and infrastructure. Resource-based investments are similarly tied to raw-material locations.
By contrast, efficiency- and export-oriented investments are generally more sensitive to cost structures. Manufacturers serving global markets may compare production, labor, logistics, and tax costs across several countries before deciding where to locate their operations.
These varied responses mean a tax holiday’s effectiveness cannot be measured simply by the amount of investment attracted. The government also needs to consider whether an investment genuinely depends on the incentive to choose Indonesia or whether it would have proceeded anyway because of other factors. That question becomes increasingly prominent as the fiscal cost of tax incentives continues to rise.
The Cost and Benefits of Tax Incentives
Tax expenditure represents potential state revenue forgone because of preferential tax treatment, such as tax exemptions and reductions.
Tax expenditure has increased in recent years, reaching IDR 362.5 trillion in 2023 and IDR 399.9 trillion in 2024. It was projected to reach IDR 445.5 trillion in 2025 and IDR 564 trillion in 2026.
These figures make regular evaluation of tax incentives central to fiscal management. Measuring realized investment alone is not enough. The government needs to weigh forgone tax revenue against the economic benefits generated, including job creation, higher productivity, technology transfer, and domestic supply chain development.
On the other hand, tax revenues follow their own dynamics. In 2025, tax revenue reached IDR 1,917.6 trillion, or 87.6% of the state budget target of IDR 2,189.3 trillion.
In the first half of 2026, tax revenue reached IDR 1,035.7 trillion, up 24.6% from the same period the previous year, and represented only 43.9% of the annual state budget target.
Concurrently, changes in the international tax landscape have not eliminated Indonesia’s need to attract investment through incentives. Investment realization reached IDR 1,010.6 trillion in the first half of 2026, comprising IDR 507.6 trillion in foreign investment and IDR 502.9 trillion in domestic investment. The investment also created 1,448,462 direct jobs.
The figures indicate investment’s continued importance to national economic policy. Consequently, the government’s challenge goes beyond retaining incentives. Instead, it also involves whether those incentives remain effective amid evolving international tax regulation.
Companies benefiting from these incentives also need to adjust their investment planning. For MNEs, the value of a tax holiday can no longer be assessed solely by the reduction in Indonesian corporate income tax. They also need to consider the group’s ETR, potential top-up tax, QDMTT, and the investment structure and economic activities falling within the scope of Pillar Two.
How Pillar Two Affects Tax Holiday
The introduction of the Global Anti-Base Erosion (GloBE) rules under Pillar Two changes how MNEs assess the value of tax holidays. Pillar Two establishes a minimum 15% ETR for qualifying MNE groups.
Under the GloBE rules, a jurisdiction’s ETR is calculated by comparing its adjusted covered taxes with net GloBE income. If the ETR falls below 15%, the difference may trigger a top-up tax.
This circumstance can reduce the economic value of a tax holiday. A company receiving a corporate income tax exemption or reduction that brings its ETR below 15% may face a top-up tax on the shortfall to the minimum rate, provided it falls within the scope of the GloBE rules and meets the requirements. As a result, tax that Indonesia forgoes does not necessarily lead to tax savings for the group as a whole since the top-up tax liability may instead offset the benefit.
Indonesia has also introduced a Domestic Minimum Top-up Tax (DMTT), recognized as a Qualified Domestic Minimum Top-up Tax (QDMTT) under PMK Number 136 of 2024. This procedure allows Indonesia to impose a domestic top-up tax when a group’s ETR falls below the minimum rate, and the relevant requirements are met.
QDMTT determines which jurisdiction receives the additional revenue generated under the GMT framework. Without such a procedure, another jurisdiction could collect the top-up tax under the Pillar Two rules in certain circumstances. QDMTT gives Indonesia a procedure to collect the top-up tax arising from activities performed within the country.
For the government, QDMTT provides a tool to protect its domestic taxing rights. For investors, it changes how they assess the economic value of tax incentives. The benefit of a tax holiday can no longer be measured merely by the amount of corporate income tax saved. Companies must also consider the GloBE ETR and potential top-up tax.
Accordingly, tax holiday design must account for how the incentive is treated under the GMT framework. MNEs, in turn, need to reassess the value of their incentives based on their group structure, ETR, QDMTT exposure, and potential top-up tax liabilities.
Alternatives to Tax Holiday
These changes do not mean that investment incentives need to disappear. The government could instead shift some forms of support away from tax reductions toward instruments that do not reduce a company’s ETR. One option is a Qualified Refundable Tax Credit (QRTC).
A QRTC is a tax credit that satisfies specific requirements and can be refunded to the taxpayer as cash or a cash equivalent. Under the GloBE rules, a QRTC is treated differently from a regular tax credit.
When properly designed under the applicable rules, a QRTC can provide an economic benefit to companies without reducing their tax liability in a way that lowers the ETR.
Regardless, QRTCs require fiscal capacity. The government needs to budget for the cash payments associated with qualifying credits. Verification and administrative systems must also ensure the credit value corresponds to eligible investment activities. Another option is a cash grant.
Unlike a tax incentive, a grant comes from government spending rather than by reducing a taxpayer’s liability. Through the budget process, the government can determine the amount of support, eligible recipients, intended purposes, and performance indicators.
This approach also makes the fiscal cost of investment more visible to taxpayers. The government can directly assess whether disbursed funds are generating the intended economic benefits.
Nevertheless, cash grants also present challenges. The government would need clear eligibility criteria, disbursement procedures, monitoring, and evaluation to ensure the support generates measurable economic benefits.
Rethinking Tax Incentive Design
Changes in the international tax landscape are also prompting a broader review of how investment incentives are designed. At least three issues deserve attention. First is the design gap, the mismatch between existing incentive structures and changes in the economy. Digital businesses, new technologies, renewable energy, and service-based business models may require approaches that differ from those designed for asset-intensive industries.
Second is the gap between fiscal costs and economic benefits. Assess the value of tax expenditure against the economic impact generated by the investment.
Third is the need to align domestic policy with developments in international taxation. Incentives that do not account for Pillar Two may become less effective for companies within its scope.
Thus, incentives should be designed around three principles: timely, targeted, and temporary. Each incentive should also have performance indicators and a review mechanism.
These changes also affect MNEs. Groups within the Pillar Two threshold need to calculate their ETR accurately for each jurisdiction. Companies should assess the impact of incentives, such as tax holidays, tax allowances, and accelerated depreciation, on covered taxes and potential top-up taxes.
Companies also need stronger data management. GloBE calculations require detailed financial and tax information, so enterprise resource planning (ERP) systems must collect and reconcile the data required for GloBE Information Return (GIR) reporting.
Companies that continue to benefit from existing incentives should likewise reassess their economic value after taking the GMT rules into account.
The Next Phase of Indonesia’s Tax Incentive
Pillar Two is changing how both the government and companies assess the value of tax incentives in Indonesia’s investment policy. Tax holidays can remain an important investment tool for capital-intensive sectors and projects that contribute to national supply chains. For companies within the scope of GMT, however, a 100% reduction or exemption from corporate income tax does not automatically translate into an equivalent tax saving, as any potential top-up tax must also be considered.
Therefore, the government needs to look beyond the amount of tax that can be reduced through an incentive and assess the economic value generated relative to its fiscal cost. Relevant measures may include realized investment, job creation, increased production capacity, technology adoption, research and development, and contributions to domestic supply chains.
QRTCs and cash grants may offer alternative ways to support investment without relying entirely on corporate income tax reductions. The appropriate instrument will depend on the government’s development objectives, the sector’s characteristics, and the economic outcomes it seeks to achieve.
These changes will require effective budgeting, administration, and evaluation systems. The government needs measurable criteria to identify priority sectors and activities, alongside regular reviews to ensure incentives remain aligned with its policy objectives.
For companies, investment planning must account for group structure and the substance of their Indonesian operations, including employees, assets, technology, and research and development activities. Companies should assess the value of an incentive alongside the GMT rules and any potential top-up tax liability.
Indonesia’s investment incentives will not eventually be determined solely by how much tax an incentive can reduce or eliminate. The focus is shifting toward targeted support that aligns with international tax rules, ties to clear investment objectives, and delivers measurable economic benefits.
Legal References
- Law of the Republic of Indonesia Number 25 of 2007 concerning Capital Investment
- Minister of Finance Regulation Number 130/PMK.010/2020 concerning Corporate Income Tax Reduction (Amended)
- Minister of Finance Regulation Number 69 of 2024 concerning the Amendment to Minister of Finance Regulation Number 130/PMK.010/2020 concerning Corporate Income Tax Reduction
- Minister of Finance Regulation Number 136 of 2024 concerning the Implementation of the Global Minimum Tax Under International Agreements
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