Indonesia Publishes Regulation for IIR, UTPR and Domestic Minimum Tax

General

On December 20, 2022, Indonesia issued Government Regulation No. 55/2022 on the Adjustment of Regulations in the Field of Income Tax (the ‘Law’). Article 54 of the Law provided that the detailed rules for the application of the Global Minimum Tax would be provided by a Ministerial Regulation.

On December 31, 2024 the Indonesian Ministry of Finance issued Minister of Finance Regulation Number 136 of 2024 (the ‘Regulation’) for the imposition of a global minimum, tax which will take effect from January 1, 2025.

The Regulation includes an Income Inclusion Rule (IIR), and a domestic minimum tax (intended to be a QDMTT) for fiscal years beginning on or after January 1, 2025.

The Under-Taxed Profits Rule (UTPR) is to apply for fiscal years beginning on or after January 1, 2026.

GloBE Application

The Regulation redrafts the GloBE provisions based on the provisions of the GloBE Model Rules. Whilst it does not reflect many aspects of the OECD Administrative Guidance, Section 72 of the Regulation includes a general interpretive provision that states that the application of the GloBE rules in the Regulation should be interpreted base on the OECD GloBE rules, unless specifically provided for in the Regulation.

For this purpose, the GloBE Rule are defined as being the relevant provisions as developed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting which includes the:

–OECD Commentary;

–OECD Examples;

-OECD Agreed Administrative Guidance;

–OECD GloBE Information Return Guidance; and the

–OECD Safe Harbours and Penalty Relief Guidance.

The attachment to the Regulation includes some detailed examples on the application of the GloBE rules in Indonesia which also includes reference to aspects of the OECD Administrative Guidance that are not specifically stated in the text of the Regulation (eg Substitute Loss Carry-Forwards and Blended CFC Regimes). The attachment is referred to in the text of the Regulation as an integral part of the Regulation.

OECD Administrative Guidance

The main text of the Regulation includes some aspects of the First and Second Set of OECD Administrative Guidance, including:

-Rebasing monetary thresholds in the GloBE Rules (1.1, AG1)

-Forex Hedge Election (Section 2.2 AG1)

-Equity Gain Inclusion Election (Section 2.9 AG1)

-Restricted Tier 1 Capital (Section 3.3 AG1)

-Portfolio Shareholding Election (Section 3.5 AG1)

-Application of Tax Transparency Election to Mutual insurance companies (Section 3.6 AG1)

-Substance-based Income Exclusion (Foreign rules and Leases) (Section 3 AG2)

The examples contained in the Attachment to the Regulation also specify other aspects of the OECD Administrative Guidance that will be applicable in Indonesia, including:

–Blended CFC Regimes (Section 2.10 AG1)

-Substitute Loss Carry Forwards (Section 2.8 AG1)

-Detailed provisions for Pension Expenses (Section 2.5 AG1)

–Deferred Tax Transitional Rules (Section 4 AG1)

No aspects of the December 2023 Set of OECD Administrative Guidance (aside from Safe Harbours), June 2024 or January 2025 Administrative Guidance is included in the Regulation.

As noted above, Section 72 of the Regulation includes a general interpretive provision that states that the application of the GloBE rules in the Ministerial Regulation should be interpreted base on the OECD GloBE rules, unless specifically provided for in the Regulation. This includes the OECD Administrative Guidance.

Safe Harbour and Penalty Relief Guidance

Chapter XII of the Regulation includes the OECD Safe Harbours, including general text for the application of Permanent Safe Harbours.

It specifically includes the following Safe Harbours:

– Transitional CbCR Safe Harbour (Sections 56-61)

– Transitional UTPR Safe Harbour (Section 62)

– NMCE Safe Harbour (Section 63)

As noted above, Section 72 of the Regulation includes a general interpretive provision that states that the application of the GloBE rules in the Ministerial Regulation should be interpreted base on the OECD GloBE rules, unless specifically provided for in the Regulation. This includes the OECD Safe Harbour and Penalty Relief Guidance.

Elections in the OECD Model Rules

The Regulation includes all elections in the OECD Model Rules including the:

-Excluded Entity Election (Article 3(12), Regulation));

-Election to use the Realization Method (Article 22(3), Regulation));

-Stock-Based Compensation Election (Article 22(2), Regulation));

-Election to Spread Capital Gains (Article 22(4), Regulation));

-Consolidation Election (Article 22(5), Regulation));

-GloBE Loss Election (Article 35 Regulation);

-Tax Transparency Election (Article 49, Regulation);

-Taxable distribution Election (Article 50, Regulation);

-Unclaimed Accrual Election (Article 34(9), Regulation));

-Distribution Tax Regime Election (Article 47, Regulation));

-Substance-Based Income Exclusion Election (Article 10, Regulation);

-Prior Year Adjustment Election (Article 36(4), Regulation));

-De minimis Election (Article 11, Regulations).

Elections in the Administrative Guidance

The following elections in the OECD Administrative Guidance are included in the Regulation:

• Equity Investment Inclusion Election (21(13), Regulation));

• Foreign Exchange Hedge Election (21(11), Regulation));

• Portfolio Shareholding Election (21(10), Regulation)).

Note that the Excess Negative Tax Carry-Forward Election and the Debt Release Election are not specifically stated.

Deviations from the OECD Model Rules/Administrative Guidance

Section 35(3) of the Regulation specifically provides that the GloBE Loss Election may only be made where the jurisdiction of the Constituent Entity:

a. does not apply corporate income tax;

b. has a corporate income tax rate less than 15%; or

c. does not apply deferred tax accounting.

Section 68(8) of the Regulation includes rules equivalent to Article 9.3.5 of the OECD Model Rules. This is an optional anti-avoidance rule for corporate inversions that jurisdictions can choose to implement or not. It relates to the 5 year exemption from the UTPR for groups in their initial phase of international operations.

There is the potential for an MNE group to use the UTPR transitional rules to avoid or minimise Pillar Two top-up tax.

This is because if an MNE group had its Ultimate Parent Entity (UPE) in a jurisdiction it would generally be subject to the Income Inclusion Rule (IIR) on low-taxed profits of its foreign constituent entities. However, the UTPR transitional rules treats all jurisdictions as having no UTPR top-up tax liability.

Therefore, a UPE could restructure the group to create a new UPE in a jurisdiction that did not implement an IIR. The UTPR would then not apply to its foreign subsidiaries providing the conditions were met for the UTPR transitional rule.

Therefore, Article 9.3.5 of the OECD Model Rules includes an optional provision that allows a jurisdiction to apply the UTPR to MNE groups that have a foreign UPE but significant operations in that jurisdiction. This is included in Section 68(8) of the Regulation.

Domestic Minimum Tax

General

Chapter XI of the Regulation Act includes a domestic minimum tax (DMTT) that is intended to be a QDMTT. This allows Indonesia to levy top-up tax on the profits of low-taxed Indonesian-based entities of MNE groups that don’t have a UPE in Indonesia.

QDMTT Design Features

Section 53 of the Regulation provides that the DMTT applies to Domestic Constituent Entities and the starting point is that it is calculated in accordance with the general top-up tax provisions.

It is then adapted for DMTT purposes.

Ownership

In order for a domestic top-up tax to be a QDMTT, the OECD Administrative Guidance provides that Top-up Tax that is subject to the QDMTT must be based on the whole amount of the Jurisdictional Top-up Tax calculated, irrespective of the Ownership Interests held in the Constituent Entities located in the QDMTT jurisdiction by any Parent Entity of the MNE Group.

This is provided in Section 52(3) of the Regulation.

Investment Entities

53(2) of the Regulation includes investment entities in the scope of the DMTT.

Pushdown Taxes

The GloBE Model Rules stipulate that the Adjusted Covered Taxes for each Domestic Constituent Entity are to be calculated by including any tax accrued by a Constituent Entity-owner located in another jurisdiction with respect to the GloBE Income of a Domestic Constituent Entity. The GloBE rules that allocate taxes of a Constituent Entity-owner are:

-Article 4.3.2(a) of the GloBE Model Rules which allocates taxes to a Permanent Establishment;

-Article 4.3.2(c) of the GloBE Model Rules which allocates taxes to a controlled foreign company; and

-Article 4.3.2(d) of the GloBE Model Rules which allocates taxes to hybrid entities.

The February 2023 OECD Guidance provides that these allocations must be disregarded for a domestic minimum tax to qualify as a QDMTT.

In addition, it provides that taxes on dividends or other distributions that would otherwise be allocated to a distributing Domestic Constituent Entity under Article 4.3.2(e) of the Model GloBE Rules must also be excluded from the DMTT calculation (aside from domestic withholding tax).

Section 53(5)(g) of the Regulation excludes these allocations for the purpose of the Indonesian DMTT, however, it doesn’t yet reflect the proviso for allocation domestic withholding tax on dividends.

Provisions that Allocate Top-Up Tax

Provisions of the GloBE Model Rules that allocate Jurisdictional Top-up Tax to individual Constituent Entities do not apply, because the domestic minimum tax charges the total Jurisdictional Top-up Tax so it is not necessary to allocate this between Constituent Entities.

As such the specific provisions of the general top-up tax calculation that allocate jurisdictional taxes including Additional Tax, are not included for QDMTT purposes.

Specific Structures

Certain provisions of the Model GloBE Rules modify how the GloBE rules apply to certain structures. These do not need to be incorporated into the domestic minimum tax eg as they are specifically addressed elsewhere or they are not relevant for Indonesian tax purposes. This includes:

-Article 6.5.1(e) and (f) that describes how the IIR and UTPR is applied to a Multi-Parented MNE Group.

-Article 7.3 of the GloBE Model Rules (Eligible Distribution Tax Systems) as this only applies to a jurisdiction that had a distribution tax system prior to July 1, 2021.

-Article 9.3 of the GloBE Model Rules that applies an exclusion from the UTPR of MNE Groups in the initial phase of their international activity.

Separate ETR Calculations

Section 53(2) of the Regulation provides for separate Domestic Minimum Top-up Tax calculations for Minority-Owned Constituent Entities, Investment Entities, Domestic Joint Venture Groups and other Domestic Constituent Entities.

Accounting Standard

Article 53 of the Regulation provides that the DMTT is calculated based on the Financial Accounting Net Income or Loss (FANIL) of the accounting standard used in the Consolidated Financial Statements of the UPE.