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Mitigating the effect of global minimum tax
The global minimum tax of 15 percent renders various fiscal incentives provided by the government to attract foreign investment in the form of tax allowances, tax holidays and super deduction tax, ineffective.
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Big tech: A man passes by a Google sign at the company’s stand during the annual meeting of the World Economic Forum in Davos on Jan. 21, 2020. The world’s largest economies have agreed on a mechanism to ensure that multinational enterprises pay an agreed-upon minimum tax. (AFP/Fabrice Coffrini)
M
ore than 138 countries in the world have agreed to implement a global minimum tax by 2024. This agreement emerged to avoid base erosion and profit-shifting practices carried out by multinational enterprises (MNEs).
Indonesia, as one of the countries that agreed to implement these provisions, is preparing to ratify them into domestic regulations. In this regard, the Fiscal Policy Agency of the Finance Ministry has said the government is currently formulating regulations regarding the global minimum tax.
However, the formulation and implementation of the global minimum tax in emerging countries like Indonesia is not easy. The main challenge in implementing this agreement is the need for foreign investment, both portfolio and foreign direct investment (FDI). Therefore, a special strategy is needed to implement this global agreement.
It can be simply explained that the global minimum tax is the minimum tax that must be paid by MNEs that have an income of more than 750 billion euros (US$818.81 billion) in one fiscal year (OECD, 2023). The agreed rate for the global minimum tax is 15 percent on profits earned by MNEs in each tax jurisdiction.
Thus, if an MNE has an overall gross income of more than 750 million euros, then the MNE must pay a minimum tax of 15 percent on profits in the taxing jurisdiction where its goods or services are provided.
The emerging idea of a global minimum tax is inseparable from the challenges faced by tax jurisdictions in the digital economy. In the era of digitalization, MNEs can conduct business activities anywhere and anytime without being limited by national borders.
Unfortunately, it is difficult for taxation authorities to prevent harmful tax avoidance through profit shifting on cross-border transactions. Thus, MNEs freely try to shift their profits to low-tariff countries.
