Global Minimum Tax: The End of the Tax Rate War

By: (Choirun Nisa'), the Directorate General of Taxes employee

The implementation of the global minimum tax has not only transformed tax rates but also has reshaped investors' preferences when choosing investment destinations. For nearly three decades, countries around the world have competed to attract investors through various policy instruments.

One of the most commonly used instruments is fiscal policy, particularly in the form of tax incentives and tax facilities such as tax holidays, tax allowances, super tax deductions, reduced corporate income tax rates, and sector-specific tax incentives. Like a double-edged sword, these fiscal instruments have been highly effective in attracting investment.

However, their excessive use has placed countries in what can be described as a "tax rate war." Instead of promoting non-tax advantages such as natural resources, human capital, or other production factors, the countries engaged in this competition tend to offer the lowest possible tax burden in order to maintain their attractiveness as investment destinations, a phenomenon commonly referred to as the race to the bottom.

Many developing countries, including Indonesia, have relied on this strategy to attract foreign direct investment (FDI). However, with the implementation of the global minimum tax, this approach has become significantly less relevant. Why is this the case?

The Concept

The core concept of the global minimum tax requires multinational enterprise (MNE) groups with consolidated annual revenues of at least EUR750 million to pay an effective tax rate (ETR) of no less than 15% in each jurisdiction where they operate. If an MNE's effective tax rate in a particular jurisdiction falls below 15%, the difference amount may be collected through a top-up tax mechanism until the minimum rate is reached. If the jurisdiction where the company operates does not implement the global minimum tax, the top-up tax may instead be collected by the jurisdiction where the group's ultimate parent entity or another group entity is located.

To illustrate, suppose multinational Company A has consolidated annual revenues exceeding EUR750 million. The company, headquartered in Country X, decides to invest in Indonesia and qualifies for a tax holiday, reducing its effective tax rate to 10%. Prior to the implementation of the global minimum tax, Company A benefited by paying only a 10% effective tax rate. Meanwhile, the Indonesian government also gained substantial benefits from the investment package, including job creation, capital inflows, technology and knowledge transfer, and other significant economic spillover effects.

However, this situation changes under the global minimum tax regime. Although Company A's effective tax rate in Indonesia remains at 10%, Indonesia's Ministry of Finance Regulation (MOFR) Number 136 of 2024 concerning The Imposition of the Global Minimum Tax According to International Agreement requires a minimum effective tax rate of 15%. Consequently, the remaining 5% may be collected by Indonesia through the top-up tax mechanism. As a result, Company A can no longer enjoy the intended tax savings from the tax holiday because its overall tax burden remains at least 15%.

In other words, the tax holiday loses much of its attractiveness. From the Indonesian government's perspective, the additional 5% top-up tax contributes to state revenue. On the other hand, this policy may reduce Indonesia's ability to attract foreign investment and the associated multiplier effects.

OLI Theory

What can the government do to maintain Indonesia's investment attractiveness? With the implementation of the global minimum tax, investors' preferences are also evolving. According to John Dunning's OLI (eclectic paradigm) theory, foreign direct investment occurs when three conditions are satisfied.

First, ownership advantages (O) refer to the firm's internal strengths that justify international expansion. Second, location advantages (L) refer to the competitive advantages offered by the host country. Third, internalization advantages (I) are factors that encourage firms to conduct business internally rather than relying on third parties.

Among these three components, only location advantages can be directly influenced by the host country's government. These advantages consist of a combination of real economic factors and tax-related factors. Real factors include infrastructure availability (such as electricity, ports, and roads), market access, labor costs and skills, legal and political stability, as well as natural resource endowments.

The Alternatives

Several policy alternatives are available for maintaining Indonesia's competitiveness. Most importantly, the government should maximize Indonesia's real economic advantages. This is necessary in light of the potential paradigm shift in investors' preferences, from one driven by tax competition to one based on system competition.

In this case, the countries compete not only through tax policies but also through the overall quality of their economic, legal, and institutional systems. Accordingly, the government should continuously evaluate the quality of these real factors and identify the areas requiring improvement.

According to the U.S. Geological Survey's - Mineral Commodity Summary: Nickel 2025, Indonesia accounts for approximately 50% of global nickel production, far surpassing any other countries. In addition, data from Statistics Indonesia (BPS) indicate that Indonesia is currently experiencing a demographic dividend, with approximately 70% of its population being of productive working age. However, survey data from the World Bank suggest that Indonesia's regulatory environment remain relatively complex.

These facts demonstrate that Indonesia has significant potential to emerge as a winner in this competition, provided that the associated risks are effectively mitigated. Ultimately, the global minimum tax restores investment decisions to their fundamental principle: investors seek locations that provide the greatest overall value, rather than merely the lowest tax burden. The question is, is Indonesia ready to become one of the winners?

*)This article represents the personal opinion of the author and does not reflect the official stance of the institution where the author works.

The content on this page may be copied and reused for non-commercial purposes. However, we kindly ask users to credit the source by linking back to the original page. Hopefully this helps.