Government To Adjust Tax Holiday Scheme To Anticipate Upcoming Implementation Of 15% Global Minimum Tax

The Ministry of Finance is currently reviewing the tax holiday scheme in light of the forthcoming introduction of a global minimum tax (GMT) set at 15 percent, which will take effect next year. This 15 percent global minimum tax stems from the Pillar 2 agreement under the Global Anti Base Erosion (GLoBE) initiative, wherein nations have consented to establish a baseline tax rate for multinational corporations. The objective of this initiative is to curtail the tendency of companies to relocate profits to jurisdictions with lower tax rates.

Tax holidays will remain in effect; however, adjustments will be required in light of the 15 percent minimum tax, stated Febrio Kacaribu, Head of the Fiscal Policy Agency (BKF) at the Ministry of Finance, during a press briefing held in Jakarta on Friday.

In Indonesia, where the current Corporate Income Tax (CIT) rate stands at 22 percent, the government is able to offer a tax exemption of up to 7 percent. This amount is calculated based on the difference between the 22 percent CIT and the 15 percent global minimum tax.

Febrio acknowledged that the enforcement of this policy might reduce investor interest in Indonesia. Nevertheless, the government is dedicated to upholding the minimum tax requirement to ensure that income not taxed within Indonesia does not incur an additional tax from the country of origin, thereby protecting Indonesia's tax rights.

"If we were to allow a tax exemption down to 0 percent, the 15 percent would be collected by the country of origin. This would effectively mean subsidizing another nation's budget. We do not wish to pursue that," he stated.

Instead, the government will explore alternative incentives to alleviate the taxpayer obligation of 15 percent. The incentives offered will primarily consist of fiscal measures.

"However, it will not result in a tax holiday down to 0 percent. The tax holiday will be limited to 7 percent within the context of Indonesia. We will evaluate our options regarding the 15 percent. Discussions are also ongoing with the Ministry of Investment/BKPM," he concluded.

The global minimum tax agreement of 15 percent was initiated by the OECD/G20 Inclusive Framework to address tax avoidance practices by multinational corporations. This Pillar 2 aims to ensure that large multinational companies (MNCs) pay a minimum tax rate of 15 percent in any country where they operate, regardless of where they report their profits.

This policy applies to multinational corporations with global revenues exceeding 750 million euros.

If a corporation pays a tax rate below 15 percent in a jurisdiction, the corporation's home country may impose an additional tax (top-up tax) to reach the minimum of 15 percent. For instance, if a company is taxed at 5 percent in a particular country, its home country could impose an additional 10 percent tax.

Consequently, this policy has the potential to enhance fairness within the international tax system while also increasing tax revenues for countries, particularly in developing nations.

Tag: BKPM CIT Investment Ministry