Indonesia – Global Minimum Tax: How To Be exempted?

To conclude the year 2024, Indonesia (as a member of the G20) has promulgated Minister of Finance Regulation No. 136 of 2024 concerning the Imposition of a Global Minimum Tax Based on International Agreements (“PMK No. 136/2024”), precisely on the 31^st December 2024. This regulation originates from a consensus previously achieved by the members of the G20 and the Organization of Economic Co-operation and Development (“OECD”) in 2021 concerning the two-pillar approach within the inclusive framework on base erosion and profit shifting (“BEPS”). In pillar two, the leaders have agreed on the establishment of global anti-base erosion rules, which mandate a minimum effective corporate tax rate for multinational enterprises that meet specific thresholds and criteria, set at 15% (“GloBE”). Although the GloBE is a common approach agreement, where the nations are not mandated to adopt minimum tax regulations, the Republic of Indonesia has elected to implement the global minimum tax through the enactment of PMK No. 136/2024, which will become effective as of 1^st January 2025 (except for the GloBE UTPR, which shall take effect on 1^st January 2026). Prior to the issuance of PMK No. 136/2024, the GloBE was introduced in Law No. 7 of 2021 and Government Regulation No. 55 of 2022 but it cannot be implemented yet due to the lack of implementing regulations detailing the mechanism – it has now been responded by PMK No. 136. The issuance of this regulation raises concerns to MNE Groups in Indonesia, specifically the ones who previously have received tax holiday facilities under certain arrangements – as PMK 69 of 2024 mandates that the tax holiday recipients will also be subject to GloBE. This publication will provide a summary of what is GloBE and review whether there is a way for an Indonesian MNE Group Company to be free from it. 

What is GloBE?

According to Article 2 of PMK No. 136/2024, the GloBE regulations apply to entities that are part of a multinational enterprise group maintaining a permanent establishment in another country or jurisdiction, with an annual gross turnover of minimum of a €750 million per annum based on consolidated financial statements, and the gross turnover threshold met in 2 (two) out of 4 (four) fiscal years preceding the effective fiscal year of GloBE (“MNE Group”). If the effective tax rate imposed on entities within the MNE Group falls below the GloBE minimum tax, these entities will be subject to an additional tax to reach the GloBE minimum tax threshold. Essentially, the implementation of GloBE is applied based on the following priority scale:

1. Qualified Domestic Minimum Top-up Tax (“QDMTT”): The QDMTT top-up tax must be paid by entities within the MNE Group to the country of the source of income that applies a low tax rate until the global minimum effective tax rate of 15% (fifteen percent) is met; 
2. Income Inclusion Rule (“IIR”): If the source country of income does not implement QDMTT and the tax paid in that country is less than 15% (fifteen percent), the domicile country of the parent company may impose an additional tax (top-up tax) to reach the global minimum tax rate; or
3. Undertaxed Profit Rules (“UTPR”): This applies if the source country of income does not implement QDMTT, and the parent company’s domicile country does not implement IIR in its domestic legislation. Under UTPR, other domicile countries of affiliate companies within the MNE Group may impose an additional tax (top-up tax).

Runaway Opportunities

Undoubtedly, the enactment of PMK No. 136/2024, which constitutes the implementation of GloBE, will spark controvercies, particularly opposition from the investors within the multinational enterprise network who have previously benefitted from tax holiday incentives in the Republic of Indonesia. Fortunately, PMK No. 136/2024 provides a safe harbour mechanism, which may free certain MNE Group companies from the GloBE’s obligations, as long as they meet certain requirements. There are three types of safe harbour under PMK No. 136/2024, i.e., (i) permanent safe harbour, (ii) temporary safe harbour – only up to 30 June 2028, and (iii) UTPR safe harbour. 

Permanent Safe Harbour

Permanent safe harbour related to GloBE in PMK No. 136/2024 is granted indefinitely as long as the relevant entities within the MNE Group meet one of the criteria stipulated in Article 55 of PMK No. 136/2024, as follows: 

1. De-minimis

The average income of entities within the MNE Group in a country or jurisdiction is less than €10 million, and the average net GloBE profit of the MNE Group (the sum obtained by aggregating the profits and losses of all entities) is less than €1 million, or there is a GloBE loss for the MNE Group in a country or jurisdiction during the current tax year and the previous 2 (two) tax years.

2. Routine profit

The profit of the MNE Group in a country or jurisdiction during a tax year is equal to or less than the amount of the substance-based income exclusion (the cumulative amount of exempted payroll costs and tangible assets as regulated under the regulation).

3. Effective tax rate

The effective tax rate of the MNE Group in a country or jurisdiction is at least 15% (fifteen percent) for a tax year.

Temporary Safe Harbour

Article 56 of PMK No. 136/2024 allows the provision of a safe harbour during specified periods, starting from the tax year before 31 December 2026, until the tax year ending on 30 June 2028, provided that the relevant entities meet one of the following criteria:

1. De-minimis

The total income of entities within the MNE Group in a country or jurisdiction is less than €10 million, and the pre-tax profit or loss in a country or jurisdiction is less than €1 million based on the country-by-country report, substantiated by qualified financial statements.

2. Routine profit

The profit or loss of entities within the MNE Group before tax, based on the country-by-country report, in a country or jurisdiction for a tax year is equal to or less than the substance-based income exclusion (the cumulative amount of exempted payroll costs and tangible assets as regulated under the regulation), substantiated by qualified financial statements.

3. Simplified effective tax rate

The simplified effective tax rate for entities within the MNE Group in a country or jurisdiction for a tax year is at least 15% (for the year 2024), 16% (for the year 2025), and 17% (for the years 2026 – June 30, 2028).

Nonetheless the above, it is good to note that there are certain exceptions for the implementation of a temporary safe harbour. If the MNE Groups meet those criteria, then they are not eligible to apply for the safe harbour, even if they meet the other requirements. 

UTPR Safe Harbour for Specified Period

According to Article 62 of PMK No. 136/2024, the additional tax under UTPR may be zero (0) provided that for each tax year during the period commencing on or before 31 December 2025 up to the tax year which ends on 31 December 2026, the ultimate parent entity’s country of domicile imposes a tax rate of at least twenty percent (20%) on the ultimate parent entity.

Conclusion 

The issuance of PMK No. 136/2024 may create objection and confusion as it is relatively new and is potentially conflicting with the previous regulations granting tax facilities to certain companies. However, the government has tried its best to include the safe harbour mechanism in the regulations, intending to protect some companies that should not be taxed with the additional GloBE tax. The government must socialize this new regulation by among others holding a symposium or discussion between the business actors so that each of them would understand the mechanism and calculation of the GloBE tax under PMK No. 136/2024 – as it is quite daunting for layman to review and apply the many possible scenarios as regulated under PMK No. 136/2024 to determine the GloBE tax calculation. 

References: 

1. Minister of Finance Regulation No. 136 of 2024 concerning the Imposition of a Global Minimum Tax Based on International Agreements;

OECD (2023), Minimum Tax Implementation Handbook (Pillar Two), OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris, https://www.oecd.org/tax/beps/minimum-tax-implementation-handbook-pillar-two.pdf.  

For Further Information, Please Contact:

MetaLAW, Legal Consultant, Jakarta, Indonesia

general@metalaw.id

1. Undang-undang No. 7 Tahun 2021 tentang Harmonisasi Perpajakan 
2. Peraturan Pemerintah No. 55 Tahun 2022 tentang Penyesuaian Pengaturan di Bidang Pajak Penghasilan 
3.  Peraturan Menteri Keuangan No. 69 Tahun 2024 tentang Perubahan atas Peraturan Menteri Keuangan No. 130/PMK.010/2020 tentang Pemberian Fasilitas Pengurangan Pajak Penghasilan Badan