Indonesia’s Strategic Pivot in the Era of Global Minimum Tax

Written by : Fatikha Faradina, Directorate General of Taxes' Employee

As we navigate through February 2026, the domestic tax landscape in Indonesia is buzzing with the massive transition to the Core Tax Administration System (CTAS). The focus of the Directorate General of Taxes (DGT) and taxpayers alike is understandably fixed on the migration of data, the new interface, and the procedural shifts that CTAS brings. However, amidst this domestic transformation, a seismic shift on the global stage is taking full effect one that fundamentally alters how developing nations like Indonesia compete for foreign investment.

With the full implementation of the Income Inclusion Rule (IIR) under the OECD’s Pillar Two framework this year, the global tax architecture has entered a new epoch. For decades, the "race to the bottom" where nations slashed corporate tax rates to attract multinational enterprises (MNEs) defined international tax competition. In 2026, that race has effectively hit a wall. For Indonesia, a jurisdiction that has historically utilized tax incentives as a primary lever for economic development, this requires a rapid and strategic pivot in policy and perspective.

The Mechanism of the Income Inclusion Rule (IIR)

To understand the urgency, we must look at the mechanics of the Global Anti-Base Erosion (GloBE) Rules. The consensus reached by over 140 jurisdictions sets a global minimum effective tax rate (ETR) of 15% for MNEs with a consolidated revenue above €750 million.

The IIR acts as the primary enforcement mechanism. It mandates that if an MNE subsidiary operates in a low-tax jurisdiction (paying an ETR below 15%), the Ultimate Parent Entity’s home country has the right and the obligation to impose a "top-up tax" on the parent company. This top-up tax covers the difference between the actual tax paid and the 15% minimum.

This mechanism creates a zero-sum game for tax incentives. Previously, if Indonesia offered a 0% corporate income tax rate via a "Tax Holiday" scheme to a European automotive giant, that company enjoyed a genuine 25% savings (assuming a standard 25% rate). Under the IIR regime in 2026, that savings evaporates. If Indonesia collects 0%, the European tax authority will simply collect the remaining 15%. The burden on the investor remains 15%; the only difference is who collects the revenue.

The Paradox of Tax Incentives

This leads to a startling paradox for Indonesian policymakers, maintaining aggressive tax holidays for in-scope MNEs is no longer an act of investment promotion, but rather a donation of sovereign revenue to developed nations.

From a management and public policy perspective, this is inefficient. We are foregoing revenue to subsidize an investor, only for that subsidy to be clawed back by another government. The intended "sweetener" for the investor is neutralized. Consequently, the classic argument that "high taxes scare away FDI" becomes obsolete for these large MNEs, because they cannot escape the 15% floor anywhere in the world.

Therefore, Indonesia’s response must be defensive yet strategic. The implementation of a Qualified Domestic Minimum Top-up Tax (QDMTT) is non-negotiable. QDMTT allows Indonesia to claim the top-up tax before the IIR kicks in abroad. It ensures that if a multinational is going to pay 15% anyway, that revenue stays in the Indonesian state treasury to fund our development, rather than subsidizing the budgets of G7 nations.

Redefining Competitiveness: The "Non-Tax" Factor

If tax rates are equalized, what becomes the differentiator? The competitive battlefield shifts from "fiscal generosity" to "ecosystem quality."

This is where the intersection of Law and Management becomes critical. Investors will reallocate capital based on the ease of doing business, legal certainty, labor productivity, and infrastructure stability. In the absence of tax arbitrage, a company will choose Indonesia over Vietnam or Thailand not because we are cheaper, but because we are better.

This shift elevates the importance of legal certainty. Multinational investors detest unpredictability. They fear aggressive audits without basis, prolonged dispute resolution processes, and inconsistent regulatory interpretations. In a post-Pillar Two world, a stable legal framework is more valuable than a tax holiday.

The Role of Coretax in Global Competitiveness

This brings us back to our current domestic milestone which is the Coretax Administration System. We must stop viewing CTAS merely as an IT project and start viewing it as our new "investment incentive."

CTAS promises transparency. With features like the Taxpayer Account Management (TAM), taxpayers have a real-time, 360-degree view of their rights and obligations. This transparency reduces the compliance cost for investors. A tax administration that is seamless, digital-first, and data-driven reduces the "hidden costs" of doing business in Indonesia.

If we can prove that complying with taxes in Indonesia is as frictionless as it is in Singapore or Australia, we gain a competitive edge that the IIR cannot erode. The efficiency of our bureaucracy becomes our new value proposition.

Conclusion

The implementation of the Income Inclusion Rule in 2026 is a wake-up call for the developing world. It signals the end of "easy" investment promotion through tax cuts. However, for Indonesia, this is an opportunity to mature.

We are being forced to upgrade the fundamentals of our economy. We are moving away from the superficial allure of tax holidays toward the substantial value of legal certainty, administrative efficiency, and economic stability. By securing our revenue base through QDMTT and leveraging the administrative improvements of the Core Tax system, Indonesia can stand tall. We are no longer competing in a race to the bottom; we are competing in a race to the top where efficiency, transparency, and certainty are the new gold standards.

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

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