Tax incentives have been one of the government’s tools for attracting investment for decades. The logic is straightforward. The lower the tax burden on investors, the higher the potential return on investment. Investment flows in, factories are built, jobs are created, and economic activity grows.
However, the introduction of the global minimum tax (GMT) is changing the effectiveness of some of these incentives. Since 2025, Indonesia has adopted the GMT under the Minister of Finance Regulation (Peraturan Menteri Keuangan/PMK) Number 136 of 2024 as part of Pillar Two of the OECD/G20. The policy establishes a 15% minimum effective tax rate (ETR) for multinational enterprise (MNE) groups with consolidated revenue of at least EUR 750 million.
This shift requires the government to rethink how they design tax incentives. A tax holiday that reduces MNEs’ ETR well below 15% may no longer provide the same benefit as it did in the past.
Consider an MNE that receives a tax holiday, resulting in an ETR of only 5% in Indonesia. Before the GMT, the resulting tax saving would accrue entirely to the investor. Once the GMT applies, a top-up tax may arise when the ETR falls below 15%, bringing the overall tax rate up to the minimum level. Consequently, tax holiday benefits may be reduced or even disappear for groups within the GMT scope.
The OECD has also acknowledged that Pillar Two affects the use of tax incentives across jurisdictions, including Indonesia. A 15% minimum tax rate makes incentives based primarily on tax rate reductions or profit exemptions less attractive. While investment competition will continue, the tools of competition are changing.
The need to redesign tax incentives becomes even more apparent when considering the scale of Indonesia’s tax expenditure. The Ministry of Finance estimates that tax expenditure reached IDR 530.3 trillion in 2025, up from IDR 400.1 trillion in 2024. In 2026, it is projected to reach IDR 563.6 trillion. Over six years, tax expenditure has nearly doubled, rising from IDR 293 trillion in 2021 to IDR 563.6 trillion in 2026.
These figures do not represent tax holidays granted to large investors alone. Tax expenditure encompasses a wide range of incentives serving various social and economic objectives. In 2025, approximately IDR 343.3 trillion, or 64.7%, was attributable to value-added tax (VAT), while income tax accounted for IDR 150.3 trillion. By sector, manufacturing received the largest estimated benefit at IDR 137.2 trillion, followed by agriculture at IDR 60.5 trillion and trade at IDR 55.3 trillion.
A significant share of these benefits is intended to support household purchasing power. The Ministry of Finance recorded that households and MSMEs received more than 70% of the benefits from tax expenditure, equivalent to approximately IDR 389 trillion in 2025.
The question, therefore, is not whether tax incentives are necessary, but how much economic value is generated for every rupiah of state revenue forgone. This question becomes increasingly important as fiscal space must also accommodate development needs.
Focusing on Economic Activity
GMT does not mean that Indonesia needs to abandon tax incentives. Instead, the government needs to be more selective about which activities qualify for incentives.
PMK Number 69 of 2024 points in this direction. The regulation amended PMK Number 130 of 2020 on corporate income tax reduction and incorporated adjustments to the global minimum tax rules. Industries classified as pioneer industries and targeted for incentives are expected to have broad linkages, high added value, new technology, and strategic importance to the national economy.
While a tax holiday provides incentives based on a company’s profits, future incentive schemes could place greater emphasis on economic activities Indonesia seeks to promote. For instance, quality job creation, higher capital expenditure, the development of production facilities, research and development (R&D), technological capacity building, domestic supply chain development, and higher-value-added exports.
An IDR 10 trillion investment with limited economic activity may not necessarily generate greater value than an IDR 5 trillion investment that creates thousands of quality jobs, establishes a research center, develops local suppliers, and produces export-oriented goods.
Redesigning Tax Incentives
In January 2026, the OECD agreed on revisions to the implementation of Pillar Two, including the Substance-Based Tax Incentive (SBTI) Safe Harbour. The scheme provides special treatment for specific substance-based incentives, including incentives related to expenditure and production, subject to limits linked to economic substance.
This development shows that tax incentives remain relevant but are increasingly linked to measurable economic activity. Under the GMT regime, incentives based on expenditure, investment, and real economic activity are becoming more relevant than incentives that simply reduce the tax rate applicable to profits.
Indonesia could develop similar approaches through investment tax credits for new investments, accelerated depreciation for productive machinery and equipment, or incentives linked to employment and R&D activities.
R&D incentives are one example. OECD data show that their use has continued to expand. In 2025, 33 of the 38 OECD jurisdictions provided expenditure-based R&D incentives, compared with 19 jurisdictions in 2000.
For Indonesia, such incentives offer benefits that are easier to measure. Investors receive fiscal support, while the government gains assessable tangible economic activity.
Lessons From ASEAN
Several ASEAN countries have anticipated GMT’s impact on investment incentives. Since 2024, Vietnam has introduced the income inclusion rule (IIR) and qualified domestic minimum top-up tax (QDMTT), and has since introduced cash grants as a new incentive.
Singapore introduced the IIR and QDMTT in 2025 and also introduced the qualified refundable tax credit (QRTC). Similarly, Malaysia implemented the IIR and QDMTT in 2025. Thailand has adjusted its tax holiday scheme by providing a 50% tax reduction with a specific period extension.
Investors will continue to compare jurisdictions. Nevertheless, the factors they consider are likely to extend beyond tax incentives to include labor availability, infrastructure, energy, legal certainty, market access, the quality of government services, political stability, supplier ecosystems, and substance-based incentives.
Indonesia does not need to compete solely on tax rates. As jurisdictions move toward a 15% minimum ETR, investment appeal will rely more on the quality of its business environment and investment location.
Measuring Return on Tax Expenditure
With tax expenditure already reaching hundreds of trillions of rupiah, the government needs to evaluate each incentive’s effectiveness better. Indonesia has made progress in transparency. In the Global Tax Expenditures Transparency Index released in May 2026, Indonesia ranked first among 116 countries. The government also consistently publishes tax expenditure reports outlining the value, objectives, and beneficiaries of various tax relief.
Each incentive program should have clear performance indicators, including additional investment directly attributable to the incentive, new jobs created, export value, R&D expenditure, the number of domestic suppliers involved, and additional tax revenue generated after the incentive period ends.
Such indicators would allow the government to assess the return on tax expenditure. If the government provides IDR 1 trillion in tax incentives, the public should be able to understand the economic benefits generated in return. Those benefits do not necessarily have to be additional tax revenue. Investment, employment, technology transfer, exports, productivity gains, and regional development can also constitute benefits. Regardless, each should be supported by measurable indicators.
Sweetening Tax Incentives
The changes brought about by GMT do not require Indonesia to abandon tax incentives. What needs to change is how those incentives are designed and evaluated.
Incentives for R&D and economic activity continue to expand across jurisdictions. For Indonesia, future incentives should be more focused on activities that create measurable economic value.
Investors do not consider tax exemptions or reductions alone. Factors such as production costs, workforce quality, infrastructure, legal certainty, market size, and the quality of the industrial ecosystem also influence investment decisions.
Accordingly, future tax incentive policies should ideally be built around three principles. First, targeted. Incentives should target sectors and activities that generate positive externalities and have strategic value for the economy.
Second, measurable. Every incentive should have regularly evaluable performance indicators. Third, substance-based. The scale of fiscal benefits should be linked to real investment, job creation, R&D activities, technology transfer, and domestic value added.
With this approach, tax incentives can not only reduce investors’ tax burden but also direct investment toward economic activities that generate tangible benefits for Indonesia.
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