Introduction

In response to the implementation of the OECD’s Pillar 2 framework, the Indonesian government has introduced Ministry of Finance Regulation No. 136/PMK.03/2024 (PMK-136). This regulation aligns with global efforts to enforce a minimum 15% Effective Tax Rate (ETR) for Multinational Enterprises (MNEs). The primary objective is to address profit shifting and ensure fair tax practices among MNE groups while also considering the Value Added Tax (VAT) implications.

Overview of PMK-136 and Its Scope

PMK-136 establishes several critical aspects regarding the implementation of the Global Minimum Tax (GMT) or GloBE rules, including:

• Criteria for GMT application
• Implementation of Domestic Minimum Top-up Tax (DMTT)
• Application of Income Inclusion Rules (IIR)
• Application of Undertaxed Payment Rules (UTPR)

Under this framework, constituent entities (CEs) of MNE groups must meet specific criteria to be subject to GMT rules. These criteria include:

• Annual gross turnover of at least EUR 750 million, based on the consolidated financial statements of the Ultimate Parent Entity.
• The turnover threshold must be met in at least two of the four tax years preceding the fiscal year in question.

Entities exempt from GMT rules include government bodies, international organizations, non-profit organizations, pension fund entities, and specific investment vehicles.

Effective Date and Compliance Timeline

The GMT rules outlined in PMK-136 officially take effect on January 1, 2025. For fiscal years ending December 31, 2025, the filing deadline for compliance with the new framework will be June 30, 2027.

Impact on VAT and MNEs Operating in Indonesia

The introduction of PMK-136 has significant implications for VAT regulations concerning MNEs operating in Indonesia. The integration of VAT compliance within the GMT framework ensures that MNEs are not only subject to corporate income tax adjustments but also to a more structured VAT regime. Key considerations include:

1. VAT Adjustments for Cross-Border Transactions
   • With profit-shifting concerns addressed, MNEs must ensure that VAT reporting aligns with new tax structures.
2. Harmonization of VAT Rates with Global Standards
   • The implementation of the minimum 15% ETR means that Indonesia may review its VAT structures to remain competitive.
3. Impact on Supply Chains and VAT Liabilities
   • MNEs operating across multiple jurisdictions must reassess their supply chain strategies, particularly regarding VAT liabilities on cross-border sales.

Compliance Strategies for MNEs

To comply with PMK-136 and its VAT-related aspects, MNEs should adopt the following strategies:

1. Strengthening VAT Documentation

Maintaining clear and transparent documentation is essential to ensure accurate reporting of VAT and GMT compliance.

2. Aligning Financial Reporting with VAT Regulations

MNEs should integrate VAT considerations into their consolidated financial statements to avoid discrepancies during audits.

3. Conducting Internal Audits

Regular audits will help MNEs identify potential compliance risks related to VAT and corporate tax requirements.

Future Implications and VAT Policy Developments

With PMK-136 coming into effect, Indonesia is expected to further refine its VAT policies to align with international standards. Potential developments include:

• Revised VAT refund mechanisms for MNEs operating under the new tax regime.
• Enhanced digital VAT reporting to facilitate real-time compliance.
• Stronger anti-tax avoidance measures focusing on VAT fraud prevention.

Conclusion

The implementation of PMK-136 marks a significant step toward global tax compliance and fairness. While the regulation primarily targets profit shifting and minimum tax enforcement, its impact on VAT compliance cannot be overlooked. MNEs operating in Indonesia must ensure they are well-prepared for these regulatory changes by adopting best practices in tax compliance, reporting, and financial planning. With the evolving tax landscape, businesses must remain proactive in understanding and addressing the implications of VAT and global minimum tax policies.