The need for Indonesia’s industries to adapt to the global minimum tax

The implementation of the global minimum tax (GMT) represents a fundamental shift in the international tax system. The GMT framework ensures that large multinational enterprises (MNEs) have at least a 15% effective tax rate (ETR) in all jurisdictions where they operate. When the ETR in any jurisdiction is less than 15%, a top-up tax is levied, either in the host country or in the jurisdiction of the ultimate parent entity (UPE). As a member of the G20 and Inclusive Framework, Indonesia has supported this change. As a result, it adopted pillar two by issuing Ministry of Finance Regulation No. 136 of 2024 (PMK-136), which establishes the requirements for its application in Indonesia.

PMK-136 took effect on January 1 2025 and follows the common approach by using the same framework provided by the OECD.

This article discusses how pillar two will impact Indonesia’s tax environment in six main areas:

• The concept of the GMT and its application through PMK-136;

• The transitional safe harbour rules and compliance requirements for MNEs;

• The initial identification of the GMT’s magnitude in Indonesia;

• The classification issue with regard to the Daya Anagata Nusantara Investment Management Agency (Danantara), Indonesia’s newly established sovereign wealth fund;

• The importance of transfer pricing in a GMT world; and

• The future of tax holidays under the GMT rule in Indonesia.

This is more than just a regulatory update for businesses; it is a strategic point that must be addressed immediately and with a focus on the future.

PMK-136 outlines the entities covered, the methods of calculation, and the requirements for compliance. The GMT applies to MNEs with an annual consolidated turnover of €750 million or more, but not to government institutions, international organisations, non-profit organisations, pension funds, investment funds, or real estate funds.

The identification of a top-up tax begins with calculating the ETR for each MNE, which is the ratio of the adjusted covered taxes to the global anti-base erosion (GloBE) income in each jurisdiction. If the ETR is less than 15%, a top-up tax is due, except for the substance-based income exclusion, which eliminates income from tangible assets and payroll expenses. The top-up tax rate applies to the jurisdiction’s GloBE income to ensure that low-taxed profits are subject to additional taxation.

To maintain the GMT framework’s efficacy, Indonesia employs a three-tiered charging mechanism:

• The qualified domestic minimum top-up tax (QDMTT);

• The income inclusion rule (IIR); and

• The undertaxed payment rule (UTPR).

The QDMTT allows low-tax jurisdictions to impose additional taxes. If this is not the case, the IIR provides that the UPE may collect the tax. If neither of the two applies, the UTPR authorises other jurisdictions to levy the tax based on economic activity. Because the regulation will take effect in fiscal year 2025, companies doing business in Indonesia should be aware of new reporting requirements, such as the annual tax return and the GloBE Information Return (GIR).

PMK-136’s safe harbour provisions allow some Indonesian constituent entities to have zero top-up tax liability for the first time during the implementation period by utilising simplified computation methods. Qualifying companies can also use freely available financial data, such as country-by-country reporting (CbCR). As a result, the regulation provides for increased convenience, while also lowering administrative complexity during the initial stages.

The safe harbour framework consists of:

• A permanent safe harbour;

• A CbCR safe harbour (for a limited time or for certain groups);

• A UTPR safe harbour (for transitional relief); and

• A simplified safe harbour for non-material entities.

These provisions are intended to reduce compliance costs and assist companies in the process of complying with the new standards.

According to the administrative and reporting requirements, the UPE of an MNE group that is a domestic taxpayer must file a GIR and notification to the Directorate General of Taxes within 15 months of the fiscal year end, or 18 months for the first year of implementation. This means that for MNEs with a fiscal year ending on December 31 2025, the earliest filing date will be June 30 2027. Furthermore, constituent entities are required to file a notification, as well as the annual tax returns, including the annual corporate income tax return for GloBE (for the UPE), QDMTT, and UTPR.

As Indonesia implements the GMT, a key question arises: how many entities will fall under its jurisdiction? At first glance, Indonesia’s 22% corporate tax, which is higher than the 15% GMT threshold, appears to imply that most MNEs and Indonesian constituent entities will not be liable to additional taxation. However, closer examination reveals that some companies may still be subject to top-up taxes.

The OECD Corporate Tax Statistics 2024 and anonymised CbCR provide preliminary information on the scope of the GMT’s impact. While the most recent available data is based on 2021 CbCR, it provides an early assessment of Indonesia’s exposure. The findings show that 46 UPEs are domiciled in Indonesia. Furthermore, about 2,669 Indonesian constituent entities, including those that are part of foreign MNE groups, have ETRs ranging from 0% to less than 15%.

Some industries – such as construction, housing, shipping, and aviation – are especially vulnerable. These industries are subject to final tax systems based on gross revenue rather than taxable income, with tax rates ranging from 1.2% (domestic shipping) to 4% (construction). Because these tax systems are not profit-based, as the GMT is, the affected entities may be subject to top-up tax liabilities, forcing them to reconsider their compliance strategies.

Another key issue in the implementation of the GMT in Indonesia is the classification of Danantara. Danantara, which was officially launched on February 24 2025, functions as a super holding entity for some of Indonesia’s top state-owned enterprises (SOEs), now supervising seven of the country’s most important SOEs. It is projected to gain control of all Indonesian SOEs soon. To evaluate the impact of Danantara on Indonesia’s strategy, it is critical to determine whether it is within the definition of the GMT rules.

The annual consolidated financial reports of the seven large SOEs under Danantara show that each has an annual revenue of more than €750 million, making them GMT UPEs. Nonetheless, a fundamental question arises: is Danantara the UPE for all these SOEs or should each SOE that meets the criterion be classified as a separate MNE group? This has significant consequences for compliance, as classifying Danantara as a single UPE would require all the SOEs under its control to submit a consolidated report.

The problem is identifying whether Danantara is classified as a government entity, an investment fund, or a UPE under GMT standards. According to OECD administrative guidance, a sovereign wealth fund is only designated as a governmental entity if it reports to the government on an annual basis, assures that its assets revert to the state upon dissolution, and distributes any earnings to the government. If Danantara fits these criteria, it will be excluded from the MNE group classification because it is classified as a government entity. Danantara is an investment fund and may avoid the UPE classification if, under Indonesian accounting standards, investments are recognised at fair value rather than through the consolidation of investee firms’ financial statements. Either of these two conditions would imply that each SOE would be reviewed separately in terms of GMT compliance.

However, if Danantara does not qualify under these exclusions, it will bear the entire regulatory burden of consolidating all its SOEs into the GMT. This would not only increase the compliance burden costs, but it might also expose SOEs with less than €750 million to GMT obligations due to their aggregation in Danantara. The associated compliance burden would include more sophisticated ETR determinations, more regular reporting to the Indonesian tax authority, and adjustments to tax structures to mitigate potential risks.

Given Danantara’s strategic economic position, there is an urgent need for regulatory clarification. Depending on how Indonesia classifies Danantara for the GMT, it could have an impact on the country’s tax policy, ensuring that global tax reforms align with national economic objectives.

The introduction of the GMT in Indonesia has markedly increased the significance of transfer pricing. PMK-136 mandates that all related-party transactions adhere to the arm’s-length principle (ALP) requirements, in accordance with Indonesia’s long-standing practice of applying the ALP to all such transactions. This measure aims to inhibit MNE groups from generating artificial losses in asset transfers that impact GloBE taxable income.

With the implementation of pillar two, MNEs must reassess their transfer pricing policies to see if their intragroup transactions comply with the ALP and GMT objectives. Certain companies may need to reassess their operating models, workforce deployment, and tangible asset management to meet the substance-based exclusions, potentially resulting in significant transfer pricing consequences and business restructurings.

PMK-136 introduces provisions targeting intragroup financing arrangements, particularly where an entity in a high-tax jurisdiction extends finance to one in a low-tax jurisdiction within the same MNE group. In the absence of appropriate alignment between interest income and deductible interest expenses, such transactions may distort GloBE income in low-tax jurisdictions, while inflating the ETR in low-tax jurisdictions (see Interplay between Pillar Two and Transfer Pricing Rules, Bilaney and Nori, 2024).

Considering that Indonesia’s statutory corporate tax rate (22%) is above the GMT threshold, this section is particularly pertinent to Indonesian companies. Entities engaged in intercompany financing arrangements must ensure that interest deductions are not misused to diminish GloBE tax liabilities without a proportionate inclusion of taxable income in high-tax jurisdictions.

It is expected that there would be a rise in the frequency of transfer pricing audits due to the growing volume of related-party transactions. To mitigate risk, MNEs doing business in Indonesia must have a consistent and well-documented transfer pricing policy that accurately represents economic substance in all related-party transactions. Compliance with the GMT rules, the ALP, and Indonesia’s transfer pricing regulations is essential to mitigate the risks of incurring tax liabilities.

Indonesia has historically used tax holidays to encourage foreign direct investment, offering reduced tax burdens to qualifying businesses. However, with the implementation of the GMT, some of these incentives may lose their effectiveness for entities falling under pillar two and hence becoming liable to a top-up tax if their ETR is less than 15%. Aware of the issue, the Indonesian government has issued Minister of Finance Regulation No. 69 of 2024, which amends PMK-130/PMK.010/2020, implying that other adjustments may be required to bring tax incentives into alignment with the GMT rules.

To determine whether a receiver of a tax holiday would be subject to a top-up tax, the ETR must be calculated using the GMT. Tax holiday recipients will not necessarily be subject to top-up tax liabilities if the total of the consolidated global revenues is lower than €750 million.

Furthermore, the concept of jurisdictional blending, in which the ETR is set on a country-by-country basis rather than an entity-by-entity one, creates opportunities. When a tax holiday holder is part of an MNE group with other companies that are highly taxed in Indonesia, the overall blended ETR may still reach 15% or higher, lowering the potential for top-up taxes.

The risk is reduced when the group qualifies for transitional safe harbour provisions. If the tax holiday recipient satisfies the safe harbour criteria, no top-up tax is imposed, allowing the entity to continue enjoying the incentive. Tax holiday recipients that are the sole constituent entity of their MNE group in Indonesia will be more vulnerable because they lack other entities to compensate for their low ETR.

Another challenge that tax holiday recipients face is if the company is structured as a joint venture (JV) or JV subsidiary. Unlike other corporate structures that can benefit from jurisdictional blending, JVs and their subsidiaries must set their own ETR. This means they cannot simply include other highly taxed entities in their MNE group to increase their jurisdictional ETR while avoiding GMT top-up tax. Due to these uncertainties, companies that benefit from tax holidays should reassess their tax planning and financial modelling, since the GMT effect has the potential to erase all, or most, of the expected tax benefits.

The implementation of the GMT represents a significant change in global tax policy, and Indonesia is no exception. Businesses are focused on meeting compliance and reporting requirements, but the GMT poses challenges that go far beyond filing obligations. With no precedent for their real-world impact in Indonesia, numerous uncertainties remain concerning how pillar two policies will be implemented in practice. This is why Indonesian MNEs must take proactive steps not only to comply with the laws and regulations but also to comprehend the financial and organisational implications of the GMT.

First, a full impact assessment is required to determine if an MNE group is liable for top-up taxes. The existence of a headline or statutory tax rate above 15% does not necessarily exclude exemption, since there are numerous modifications and exclusions in the GMT that might result in a lower ETR. To avoid surprises, businesses should thoroughly study and assess any factor influencing jurisdiction-specific variances and potential risks (“Pillar Two: Gauging the Impact on the Banking Landscape”, Finance and Capital Markets, Vol. 24 (2023), Issue 3, G Robinson et al, 2023). Even if an entity is not subject to a top-up tax, the compliance burden remains significant, requiring companies to align their reporting framework with GMT requirements.

In addition to the standard tax computations, GMT compliance poses a significant challenge for data collection and reporting. The GIR requires companies to assemble, evaluate, and verify over 100 types of information, many of which may be difficult to identify using the current reporting mechanisms. Because of the level of detail in the information to be collected, it is highly recommended that the task is not done at the last minute. It is therefore vital to plan ahead of time, with MNEs spending to upgrade or develop compliance systems capable of rapidly capturing, tracking, and analysing relevant data across jurisdictions.

Furthermore, companies must assess their IT and financial systems to ensure data consistency across numerous entities and jurisdictions. GMT compliance can be particularly challenging for MNE groups with multiple accounting systems or decentralised tax policies. Some of the ideas include the use of automation and integrated reporting to deal with the complexity and reduce the chance of errors throughout the tax filings process.

Although the focus is on compliance and reporting, the long-term implications of the GMT go far beyond data collecting and regulatory conformance. As a result, Indonesian MNE groups must consider their cross-jurisdictional transaction structures and manage their internal transfer pricing policies moving forward.