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Tax incentives for potential investors in new capital city project
Tax holidays with partial exemption, tax allowances and super deduction types of tax incentives will still likely survive in the post-Pillar Two world.
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Pioneering point: People visit “ground zero” of Nusantara, the new capital city to be developed in Sepaku district in North Penajam Paser, East Kalimantan, on Aug. 17. The nation’s new capital has reportedly been designed as a sustainable city. (Antara/Bayu Pratama S.)
The Indonesian government has offered generous tax incentives to woo investors to the new capital city (IKN) project in East Kalimantan, as elaborated at the Business 20 (B20) Summit in Bali in November 2022. The offered series of direct tax incentives will include tax holidays for up to 20 or 30 years and a super tax deduction of up to 350 percent.
The latter incentive, in principle, allows multiple deductions on the actual expense leading to a lower annual income tax liability, while the former relieves the whole annual income tax liability.
The global minimum tax, known as the Organization for Economic Cooperation and Development (OECD) Pillar Two Solution, has been accepted by the European Union countries. Indonesia, which held the Group of 20 presidency in 2022, also announced a commitment to support the swift implementation of the OECD Two-Pillar Solution during the G20 Leaders Summit in Bali in mid-November 2022.
It is worth noting that Pillar Two is designed to ensure that multinational entities (MNE) pay a minimum effective tax rate (ETR) of 15 percent on profits in all countries. It aims to address the ongoing concerns about profit shifting with tax avoidance by multinational national enterprises (MNEs) and the so-called “race to the bottom” on corporate income tax (CIT) rates. The ETR is calculated by dividing the sum of the taxes paid (numerator) by the net income (denominator). Pillar Two consists of some principal rules: Income Inclusion Rule (IIR), Under Tax Payment Rule (UTPR) and Qualified Domestic Minimum Top-up Tax (QDMTT).
The IIR is a residence-based income tax rule that allows the ultimate parent entity (UPE) jurisdiction to impose a top-up tax of any low-taxed subsidiary. In a condition where IIR does not apply in the jurisdiction of the UPE, UTPR allocates the taxing rights over the under-taxed CIT. The QDMTT rule allocates the top-up tax in first order.
