Chasing $570M with Global Minimum Tax : Sri Mulyani’s Bold Move

Sri Mulyani’s Bold Move: Chasing $570M with Global Minimum Tax

Introduction

Indonesia has taken a significant step in tax policy with the implementation of the Global Minimum Tax (GMT). Led by Finance Minister Sri Mulyani, this policy aims to ensure that multinational corporations pay their fair share of taxes, potentially increasing Indonesia’s revenue by Rp8.8 trillion ($570 million). The regulation, formalized in the Minister of Finance Regulation No. 136/2024, aligns Indonesia with international agreements on corporate taxation.

Who is Targeted by the Global Minimum Tax?

The Global Minimum Tax applies to constituent entities of multinational groups (Grup PMN) with an annual gross revenue of at least €750 million (Rp12.7 trillion). According to Article 2 of the regulation, companies meeting this threshold will be subject to the new taxation rules.

A multinational group (Grup PMN) refers to a group of companies that have at least one entity operating in a jurisdiction different from the parent company’s location. The gross revenue used for this calculation is derived from the consolidated financial statements of the parent entity. Additionally, the revenue threshold must be met for at least two out of the four fiscal years preceding the tax implementation year.

For newly formed multinational groups, if they reach the revenue threshold in their first two years, they will be subject to the Global Minimum Tax in their third year.

How is the Global Minimum Tax Applied?

The tax is imposed on domestic taxpayers and permanent establishments that qualify as constituent entities of multinational groups. The implementation is based on three main mechanisms:

1. Income Inclusion Rule (IIR)

The IIR imposes additional tax obligations on domestic parent entities of multinational groups if any of their subsidiaries in other jurisdictions pay an effective tax rate lower than the minimum threshold.

2. Undertaxed Payment Rule (UTPR)

The UTPR ensures tax payments when the IIR does not apply or when additional tax has not been fully imposed. This rule is particularly significant for multinational corporations operating in low-tax jurisdictions.

3. Domestic Minimum Top-up Tax (DMTT)

The DMTT is a supplementary tax levied on Indonesian constituent entities of multinational groups that pay an effective tax rate lower than the agreed minimum rate.

Tax Rate and Calculation

The globally agreed minimum tax rate stands at 15% of the profit earned by multinational corporations in each jurisdiction where they operate. This measure prevents companies from shifting profits to low-tax countries to reduce their tax burdens.

The revenue calculation follows a specific method, considering financial reports and tax compliance records of the past years. This ensures that Indonesia captures an accurate representation of taxable income from multinational entities operating within its borders.

Exemptions from the Global Minimum Tax

Not all organizations are subject to the new tax regulation. Article 3 of PMK 136 outlines specific exemptions for the following entities:

• Government bodies
• International organizations
• Non-profit organizations
• Pension funds
• Investment funds that serve as parent entities
• Real estate investment vehicles serving as parent entities

These exemptions recognize the unique structures and financial purposes of these organizations, distinguishing them from profit-driven multinational corporations.

Expected Impact on Indonesia’s Economy

The introduction of the Global Minimum Tax is expected to enhance Indonesia’s fiscal revenue while promoting fairness in taxation. Several key impacts include:

1. Increased Tax Revenue

By closing loopholes that allowed multinational corporations to minimize their tax obligations, Indonesia is projected to gain between Rp3.8 trillion and Rp8.8 trillion annually. This additional revenue can support infrastructure, education, healthcare, and other public services.

2. Strengthened Compliance and Transparency

The GMT encourages multinational corporations to improve tax transparency and compliance, aligning Indonesia’s tax framework with international best practices. This move will likely foster a more predictable and stable business environment.

3. Fair Competition for Local Businesses

By ensuring that multinational corporations pay a fair amount of tax, the GMT prevents them from gaining an unfair advantage over local businesses that are already subject to standard tax rates.

Challenges in Implementation

Despite the benefits, the enforcement of the Global Minimum Tax may face challenges, including:

• Administrative Complexity: Implementing the tax requires significant regulatory oversight and cooperation with international tax authorities.
• Corporate Resistance: Some multinational companies may seek ways to restructure operations or challenge the new regulations.
• Jurisdictional Conflicts: Differences in tax laws across countries could lead to disputes over tax liability and enforcement.

Conclusion

Sri Mulyani’s move to implement the Global Minimum Tax marks a significant step in Indonesia’s fiscal policy. By targeting multinational corporations with a minimum tax rate of 15%, Indonesia aims to increase government revenue, promote tax fairness, and align with international tax standards. Although challenges exist, this policy sets a new precedent for corporate taxation in Indonesia and strengthens the country’s financial stability in the global economy.