Indonesia to Adopt Global Minimum Tax in 2023: What It Means for Businesses

The rise of global tech giants and digital platforms has led to many countries needing help to tax these new forms of economic activity. As a result, the concept of a global minimum tax (GMT) has gained traction among policymakers worldwide. 

Global Minimum Tax Happens Due to The Digital Economy Transformation

Taxation of the digital economy has become a significant challenge for governments around the world due to the borderless nature of digital transactions.  The digital economy has revolutionized businesses, and traditional taxation methods may only apply to some digital worlds. 

Many digital companies operate in different countries without having a physical presence, making it difficult to determine where they should pay taxes. Some countries have introduced new tax laws targeting digital companies to address this issue, while others have proposed changes to existing tax laws. 

The Organisation for Economic Cooperation and Development (OECD) has been working on a new framework for taxing the digital economy, which aims to ensure that companies are taxed in countries where they generate significant revenues, even if they have no physical presence there. 

However, the challenge remains to balance ensuring that digital companies pay their fair share of taxes and not discouraging innovation and growth in the digital economy.

The Regulation of Global Minimum Tax for Countries

The OECD initially introduced its efforts to establish a taxation system for the digital economy in 2013.

It initially merely started as an initiative to address tax avoidance. However, it has progressed to reshape the international tax landscape. In doing so, the OECD has set up a two-pillar approach.

Pillar One

Pillar One aims to promote a more equitable distribution of profits and taxation rights among the largest and most profitable multinational enterprises (MNEs) by reallocating some taxing rights from their home countries to the markets where they conduct business and generate profits. 

It applies regardless of whether the MNE has a physical presence in that market. In addition, the new rules will apply to MNEs with global sales exceeding EUR 20 billion and profitability exceeding 10%. 

Where the 25% of profit exceeding the 10% threshold is allocated to the market jurisdictions.

Pillar Two

Under Pillar Two, GMT contains two policy plans. First, Global anti-Base Erosion Rules (GloBE) consist of two schemes: the income inclusion rule (IIR) and the undertaxed payment rule (UTPR). 

The minimum tax on IIR and UTPR is 15%. So, IIR will force MNEs to pay an effective corporate income tax rate of 15% regardless of location. 

Therefore, if the investment destination country for MNEs imposes a rate below 15%, the difference will be an additional tax burden (top-up tax) imposed on the parent entity in the country of residence. 

Meanwhile, the UTPR scheme means that the costs incurred by MNEs in their country of residence to constituent entities in countries with an effective tax rate below 15% are non-deductible. If the IIR has been implemented in the parent country, the UTPR will not apply.

The second is the STTR (Subject to Tax Rule) scheme, which allows the source country to tax affiliate income in the country of residence when the income is not or is taxed under the effective tax rate of 9%. 

STTR will only be imposed bilaterally through a Double Taxation Avoidance Agreement (P3B) by looking at the country of origin.

The STTR scheme aims to realize the single tax principle: income must only be taxed once and eliminate double taxation and double non-taxation.

The Purpose of Implementing Global Minimum Tax for Companies and Countries

In recent decades, there has been a decline in corporate tax rates worldwide due to governments’ competition to encourage private investment and foster economic growth. 

Global corporate tax rates have dropped from over 40% in the 1980s to below 25% in 2020. The OECD tax plan aims to stop this wave of policies, making it more difficult for governments to generate revenue to fund their increasing spending budgets. 

The proposed minimum tax is especially significant as governments grapple with deteriorating public debt metrics worldwide.

Read more: Building a Sustainable Future: Carbon Taxation on Coal Use in Businesses

Global Minimum Tax for Developing Countries

Although the media coverage of the agreement has concentrated chiefly on the taxation of the digital economy, the global minimum tax is expected to have a more significant effect on developing nations. 

It is a critical development as corporate income taxes can provide governments with vital revenue to achieve their public policy goals. Moreover, for several decades, corporate income tax rates have been declining due to tax competition. 

Developing countries, in particular, depend more heavily on corporate income tax revenue. With the economic impact of the ongoing COVID-19 pandemic in the past two years, these governments need to locate resources to fund improved physical and digital infrastructure.

Pros & Cons of Global Minimum Tax

There are several benefits to imposing a global minimum tax rate. Amongst others, this would allow for a reallocation of tax revenues. 

The revenues earned from imposing a minimum tax rate would allow the government to increase public spending for the country. 

Individuals could also be imposed fewer taxes due to the additional revenue. It also pushes for better international competition for small businesses, allowing them to thrive in a tough economy. 

The cons, conversely, are that developing countries may lose out on the growth they have enjoyed from offering large companies low taxes. The effectiveness of this policy is also to be questioned.

The Impact on The Economy

Pillar Two aims to curb tax competition between governments that arises from their efforts to attract or retain actual investments by imposing a lower limit on taxes. 

The primary rationale behind creating Pillar One is to boost revenue collection. The slowdown in the decrease of statutory corporate tax rates indicates a decreased demand for reductions in corporate taxes.

Action on Global Minimum Tax for Indonesia

The Indonesian government is anticipating the impact of implementing a global minimum tax. Therefore, it seeks other countries’ input to plan the best implementation of this policy. 

There could be an impact on Indonesian tax schemes such as tax holidays. However, Indonesia has a year to discuss and prepare for the implementation. 

It is looking for the best way to implement initiatives that would be fair yet also provides benefit to investors. 

In conclusion, many changes are expected to the current regime as Indonesia slowly transitions to implement a global minimum tax.

To embrace such changes, InCorp Indonesia provides accounting and tax consulting services that would ease the process for all businesses.