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Global minimum tax: Indonesia must safeguard its tax rights
Indonesia needs to accelerate legislation so it can take full advantage of the GLoBe tax regime and its QDMTT tax facility, which will protect is right to tax multinationals.
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The Google logo is displayed on a mobile phone on Feb. 11, 2016 in London. Britain's tax agency announced in January 2016 that the United States technology giant would pay a 130 million pound ($187 million) tax settlement for operating 10 years in the United Kingdom, where it makes 11 percent of its global sales.
(AFP/Leon Neal)
The race to the bottom in global tax, with worldwide tax rates dwindling to attract investment, has been widely debunked as harmful. In this race, multinational enterprises (MNEs) could "shop around" to minimize their tax burden at the expense of a country’s citizens, who should have received the benefits of taxes.
According to the Tax Foundation (2021), the worldwide rate of corporate income tax (CIT) averaged 40.11 percent in 1980 and had declined to 23.54 percent in 2021. Moreover, worldwide CIT avoidance stands at US$100-240 billion every year (Organisation for Economic Co-operation and Development/OECD, 2021).
To combat unhealthy competition, the OECD and the Group of 20 have agreed on the Global Anti-Base Erosion Rules (GloBE), intended to ensure that MNEs pay an agreed minimum tax.
The GloBE is one of the key planks of a larger project called the Two Pillar Solution spearheaded by the OECD to address the tax challenges in a globalized economy. The GloBE will enforce a global minimum effective tax rate (ETR) of 15 percent on profits of more than 750 million euros ($803.54) of annual revenue that MNEs earn.
The ETR reflects the actual proportion of tax levied on a company's profits. Thus, although a country’s CIT rate may be well above 15 percent, a company’s ETR may be below 15 percent due to tax incentives or computational differences.
Under the GloBE, the parent entity of an MNE is able to pay a “top-up” tax on itas subsidiary with an ETR below 15 percent. Any jurisdiction can still set whatever CIT rate it wants, but if an MNE pays lower rates in a particular country, the country where its parent entity is headquartered will impose the top-up tax, eliminating profit shifting as an incentive.
For example, say that X Company’s parent entity is located in the United Kingdom. X Company has a subsidiary in the Cayman Islands, a tax haven country with a 0 percent tax rate. X Company also has a subsidiary in Indonesia, where it uses tax incentives to result in an ETR of 10 percent. Under the GloBE regime, the UK can impose a top-up tax of 15 percent (15-0 percent) on its subsidiary in the Cayman Islands and of 5 percent (15-10 percent) on its Indonesian subsidiary.
