Tax Strategy as an Alternative to Tax Incentives to Stimulate Investment in the Global Minimum Tax Era in Indonesia

Abstract

Digital transformation has been accelerating the development of the global tax landscape, giving multinational companies the potential to generate revenue from certain jurisdictions without any physical presence in the relevant countries. This condition has triggered global initiatives aiming to prevent cross-jurisdictional tax evasion through the Global Minimum Tax (‘GMT’) consensus. This study will discuss how tax incentive policies in Indonesia can face the challenges brought by GMT while guaranteeing a good business climate for foreign investors. A normative research method alongside a descriptive and comparative approach will be used to analyze regulations and tax policies on investment in Japan and Vietnam, highlighting learning opportunities for Indonesia. The results of our research show that Japan and Vietnam still use tax incentives as a means to attract foreign investors, but only as additional factors. In contrast, the a quo condition in Indonesia shows an attachment to tax incentives as the main stimulus of investment, despite Indonesia’s natural resources, human resources, and existing markets having the potential to become the main capital drawing interest from foreign investors. Furthermore, the adoption of GMT in Indonesia is currently at the ministerial regulation level and is still considered insufficient, since it is not in line with the hierarchy of law, both in terms of legal norms and the principle of legality in taxation. Thus, Indonesia needs to immediately shift its focus to alternative incentives and ensure the integration of GMT into the national law through the reformation of policies and rules and regulations concerning taxation and investment.

1. Introduction

When globalization synergizes with technology transformation, it becomes a catalyst for innovation and efficiency in all areas of people’s lives, including business activities (Berutu et al. 2024). However, it also means that international tax regulation starts to lose its relevance. The definition of international taxation states that a company that has no physical presence in a certain country shall not be taxable in that jurisdiction, even though its operation covers a market in that country (Wulandari 2024). This requirement for a physical presence becomes a weakness for international tax regulation in the case of technology transformation, as businesses can operate without a physical presence, creating an opportunity for profit shifting that will erode the tax basis of certain jurisdictions (Ibid., p. 221). Such a condition has created an urgent need for reformation of the international taxation system to prevent profit shifting and enforce a fairer profit distribution.

The ongoing reformation of the international tax system depends on the global consensus coordinated by the Organisation for Economic Co-operation and Development (‘OECD’) in a collaboration project called the Two-Pillar Solution. In this solution, the OECD tries to offer a new taxation concept based on two main pillars. Pillar One, or Global Anti-Base Erosion (‘GloBE’), covers the regulation of nexus and profit allocation for business activities, particularly digital businesses (Organisation for Economic Co-operation and Development 2021). This pillar introduces the market jurisdiction concept, given to market countries to collect taxes from businesses upon the contribution of a country to the revenue of a company (Cahyadini et al. 2022). Meanwhile, Pillar Two focuses on the imposition of Global Minimum Tax, or GMT, to tackle problems relating to base erosion and profit shifting (‘BEPS’), which are not resolved by previously existing anti-tax evasion regulations.

GMT is a regulation-stipulating minimum tax rate boundary, mandatorily imposed on each multinational company for the revenue collected from the destination countries of the company (Ibid.). This regulation is designed to reduce unfair competition among states through guidance on the tax rate and profit-shifting practices carried out by companies. Through GMT, each company is obligated to pay a minimum tax of 15% for the revenue generated in each market jurisdiction of the company (OECD 2023). Top-up tax provisions are also added in the GMT regulation as a protection mechanism (Belianto and Rahayu 2024). Companies must pay additional tax if the effective tax rate imposed by the market jurisdiction is below 15% (OECD 2023).

The requirement for the affected members of the MNE (Multinational Enterprise) Group to pay additional taxes arises based on three types of provisions, namely, QDMTT, the IIR, and the UTPR. QDMTT (Qualified Domestic Minimum Top-Up Tax) is a provision whereby low-tax jurisdictions have the primary right to collect additional taxes based on the QDMTT provisions (OECD 2023).

The IIR (Income Inclusion Rule) applies if a low-tax jurisdiction does not implement QDMTT, and the jurisdiction where the Ultimate Parent Entity (UPE) is located may apply the IIR in relation to income from Constituent Entities subject to low taxation. The UTPR (Undertaxed Payment Rule) applies if the qualifying IIR is not applied; then, additional taxes are collected by the jurisdiction applying the UTPR. The amount of tax collected under the UTPR in each jurisdiction is allocated with reference to a substance-based allocation key.

GMT is imposed on multinational companies with a global revenue of more than EUR 750 million (Ibid.). This provision was agreed by the countries participating in the consensus, including the G20 and OECD countries. Indonesia is one of the countries that supported the achievement of the consensus and the GMT implementation agenda in this working project. The implementation of GMT will create a huge profit for Indonesia by increasing state revenue through tax, the country’s main source of state revenue, and it is expected that the increase in state revenue will be in line with the advancement and stability of the national economy. Nonetheless, it is undeniable that GMT might potentially weaken Indonesia’s charms as an investment destination country on an international scale.

Tax incentives have long been considered a good move for attracting investors to invest their capital in Indonesia (UNCTAD 2020). Thus, the GMT implementation agenda must be met with a well-established strategy, to enable Indonesia to still compete fairly with other countries as an investment destination country. Since being approved, several countries including the United Kingdom, Switzerland, Korea, Singapore, and Japan have prepared to integrate the GMT into their taxation systems by drafting domestic regulations in line with the Two-Pillar Solution principles (Vasal et al. 2023).

Such reformation of domestic regulation is crucial (Ali Suryo Herlambang 2025, p. 3815) as it is projected that expenditure-based tax incentives, such as tax allowances, investment allowances, and super tax deductions, will not be effective for attracting investors’ interest if GMT is implemented. This decrease in tax incentive efficacy has become a challenge for states that are still dependent on tax incentive schemes as a stimulus for investment, particularly Indonesia. In Indonesia, tax is the main tool used to sustain investment competitiveness in the international market, even though it has other benefits to possibly offer investors, such as vast market potential, abundant human resources, and sufficient natural resources. Fiscal incentives are still granted to increase investment in various pioneer sectors, with the hope of encouraging the state’s growth and development.

This overly narrow focus on fiscal incentives has meant that Indonesia has neglected other potential investment strategies that may be adopted. The implementation of GMT at the beginning of 2025 will revoke the incentives that have been given to Indonesia, since companies that have not paid the standard tax rate of 15% will have to pay the rest of the tax to their home countries. In this context, the GMT scheme may well be considered detrimental to Indonesia. It means fiscal incentives, still one of the main stimuli for attracting investment to the domestic regime, will no longer be attractive for investors, particularly foreign ones, and maintaining current fiscal incentives will cause a loss to Indonesia, since it means that the country will be voluntarily waiving its rights to potential tax revenue to the home countries of the companies due to regulations straying from the GMT provisions.

Therefore, Indonesia needs to diversify its investment strategy to face the GMT era. If the Indonesian government continues to maintain the current fiscal incentives for foreign investment, it will forfeit potential tax revenue and could be seen as violating the provisions of the GMT. Additionally, if the existing policy on fiscal incentives remains unchanged, it may become ineffective in attracting foreign investment, especially as many other countries begin to implement the GMT. The government will need to reform Indonesia’s tax regulation and provide a friendlier investment ecosystem without defying GMT provisions, to enable the state to compete globally in terms of investment. For that reason, this research will study how tax incentive policies can cope with GMT and create a good business climate for foreign investors. This research aims to provide recommendations to Indonesia’s government on drafting more sustainable investment policies, taking into consideration the changes in the global context and the challenges the country faces. It will also study the strategies relating to GMT of other states, particularly Japan and Vietnam.

This article is divided into four sections: Section 1 is an introduction that provides background information on the subject, including context on GMT implementation at the global and national levels and its implications for the investment climate in Indonesia. Section 2 describes the research methods used as the basis for analysis. Section 3 presents a discussion divided into three main subsections elaborating on key issues related to taxation policy and alternative regulatory strategies. Lastly, Section 4 contains conclusions that summarize the main findings and offer policy recommendations to strengthen Indonesia’s investment competitiveness amid global dynamics.

2. Methods

This journal article is written using an approach that combines descriptive and comparative analysis, focusing on regulation and policies in the field of taxation and investment. Descriptive analysis is used to depict relevant materials on tax incentives and investment policies in Indonesia, Japan, and Vietnam. Vietnam was selected because it represents one of the fastest-growing investment destinations in Southeast Asia. Japan, on the other hand, was chosen since it is among the countries that responded to the GMT swiftly and effectively (OECD 2025). Where numerical data are included, they are not intended for statistical testing but rather to strengthen and sharpen the descriptive analysis. Comparative analysis is used to illustrate comparative policies in such a way as to highlight their relevance and their practical solutions.

The data sources used comprise primary, secondary, and tertiary data: primary data are obtained from the regulations of each state; secondary data are obtained from the OECD publication, the Investment Coordinating Board (‘BKPM’) in 2024, and the relevant academic literature; and tertiary data in the form of digital publications from the media on similar topics or news on investment, taxes, and GMT are used to complement the information used in the writing of this article.

The data collection techniques deployed in the writing of this article include a literary study and comparison between states. The literature study is used to collect and analyze the academic literature and regulation or policy documents, and comparison between states is used to identify the differences and similarities in investment policies granting tax incentives within each state and their implications for the investment climate in their relevant countries. Data are also obtained from webinars and focus group discussions with relevant institutions, including, among others, the Investment Coordinating Board, the Directorate General of Taxation of the Ministry of Finance of the Republic of Indonesia, and the Fiscal Policy Agency of the Ministry of Finance of the Republic of Indonesia, as well as academics and practitioners.

3. Discussion

Tax incentives are a fiscal policy instrument often relied on by governments to attract investment via easing tax expenses for investors as taxpayers (UNCTAD 2020, p. 11). Reduced tax expenses may be used to suppress production costs from investment objects, potentially providing more profit for investors. Sinambela revealed that the term ‘tax incentive’ covers various conveniences in the taxation system, ranging from tax reduction and exemption to the suspension of tax payment (Zuhendra and Rahmi 2023). Such offers reflect a government’s endeavors to stimulate the economy through the reduction in tax obligations.

In Indonesia, tax holidays are the most commonly used tax facility (Kumalasari and Wicaksana 2021), offering tax relief for companies fulfilling certain criteria. Unfortunately, it is also the most affected tax facility in the case of GMT enforcement (Tax Centre Universitas Indonesia 2025). For example, when a multinational company invests its capital in Indonesia, due to Indonesia’s current tax incentive regulation, the company will be eligible for a certain tax holiday rate over a certain duration of time. However, when GMT is enforced, via one of two possible schemes, a significant change will occur: In the first scheme, if Indonesia does not adopt the GMT provisions, then the multinational company will be compelled to pay a top-up tax by its home country. This scheme will be potentially detrimental to Indonesia, from the perspective of both investment attractiveness and potential state revenue in the form of tax. The author considers the implementation of this first scheme to be unwise, bearing in mind the potential loss Indonesia would face in terms of taxation and international politics.

In the second scheme, Indonesia must adjust its tax policies and arrange a new incentive policy aligned with the OECD’s law model without neglecting its attractiveness to investors. This pressure for policy reformation is an opportunity for Indonesia to explore other sustainable strategies, allowing the country to simultaneously preserve its potential as an investment destination and potentially generate revenue by taxing such investment activities. Indonesia must go beyond its comfort zone by minimizing its attachment to tax incentives as a stimulus, particularly foreign investment, and choosing the second scheme.

3.1. Tax Incentives as an Investment Stimulus

Tax incentives are a common fiscal policy used by governments to ease the tax burden on taxpayers through either financial or non-financial relief. According to Sinambela, tax incentives encompass all forms of relief provided to taxpayers within the framework of the tax system (Zuhendra and Rahmi 2023, p. 171). This definition includes various facilities aimed at providing benefits to taxpayers, whether in the form of tax reductions or exemptions or deferrals of payment (Ibid.). Therefore, tax incentives can be considered a government policy tool designed to support economic growth through the reduction in tax obligations.

The Black Law Dictionary defines tax incentives as an offer from the government to taxpayers in the form of tax benefits provided to support certain activities that are considered important (Ibid.). For example, contributions in the form of money or assets for activities that meet certain requirements will receive tax benefits as a form of incentive. This definition shows that tax incentives are not only technical in nature, but also a government strategy to encourage economic activities that are in line with development policies.

In Winardi’s opinion, tax incentives are a form of taxation that aims to provide incentives to taxpayers (Jessica Tanujaya and Ngadiman 2021, p. 1336). Through tax incentives such as tax reductions, governments can unlock the potential for state revenue while providing a boost to investment and economic activity in certain prioritized economic sectors (Ibid.). From these various definitions, it can be concluded that tax incentives are policies that not only provide direct benefits to taxpayers but also serve as tools to achieve broader economic objectives, such as increasing investment, promoting tax compliance, and strengthening strategic sectors in the economy.

The impact of taxes on inward investment is considered an inherent factor that can increase investment intentions. Countries offering lower tax rates or providing tax incentives are often more attractive to foreign investors. These incentives, such as tax holidays or tax exemptions for a certain period, can encourage multinational companies to choose a particular country as an investment location. However, overly lenient tax policies can also cause problems. In some cases, countries that rely too heavily on tax incentives risk losing tax revenue that they should be receiving from foreign investors. Therefore, many countries are now beginning to implement more balanced policies, where tax incentives are only given to strategic sectors that have the potential to contribute to long-term economic growth. In addition, taxes also influence capital inflows through investment protection mechanisms (Inv Policy Report BKPM, p. 12). Countries often offer bilateral investment treaties (BITs) that include tax protection and dispute resolution mechanisms to protect foreign investors from sudden changes in tax policy. In this way, countries seek to create a stable and predictable environment for foreign investors.

3.2. Tax Incentive Strategy as Investment Climate Stimulus in Vietnam and Japan: A Study for Indonesia

The granting of tax incentives to encourage investment has been carried out by many states beyond Indonesia, from developing countries such as Vietnam to developed countries such as Japan. According to the result of a comparative study, tax incentive policies in Indonesia and Vietnam show similarities in their support of a competitive investment climate; these two states use tax incentives as a strategic instrument for attracting investment to their domestic regimes (Researcher Team from the University of Padjadjaran 2024).

As one of the developing countries in Southeast Asia, Vietnam has shown good performance in attracting Foreign Direct Investment (‘FDI’) during the last several years, making it one of the main destination countries for investment in the Southeast Asia region (UNCTAD 2000). According to the data from the Ministry of Investment Planning in Vietnam, the total FDI distributed to the country in 2024 reached a record USD 25.35 billion, increasing 9.4% from the previous year (Ministry of Planning and Investment 2025). Despite the total registered investment slightly decreasing to 3%, equivalent to USD 38.2 billion, the increase in project numbers and capital adjustment shows the strong trust that investors have in the business climate in Vietnam (Ibid.).

Tax incentive policy in Vietnam covers various types of taxes, but the main highlight of investment enhancement efforts in the country is the Corporate Income Tax (‘CIT’) incentive facility (Long 2024). As an investment facility, CIT is granted to several priority sectors, supporting industry, huge projects, research and development activities, and strategic location, but also sectors mainly employing women or minorities. In Indonesia, policies related to CIT are regulated through the Regulation of the Minister of Finance Number 69 of 2024 concerning the Amendment of Regulation of the Minister of Finance Number 130 of 2020 concerning the Grant of Reduction Facility for Corporate Income Tax.

Fiscal incentives may be granted in the form of a tax holiday, a tax allowance, an investment allowance, or a Specific Economic Region incentive. In Indonesia, tax holidays are given through the Regulation of the Minister of Finance Number 69 of 2024 concerning the Grant of Reduction Facility for Corporate Income Tax (PMK 69/2024) (OECD 2025), whereby a reduction in CIT or a tax holiday is granted to corporate taxpayers fulfilling the required criteria: running in a pioneer industry; having a minimum investment of IDR 100 billion; fulfilling the debt-to-capital ratio requirement; and committing to realize its investment no later than 1 year after the issuance of the tax holiday decision (“Article 2 Paragraph 1 Regulation of the Minister of Finance Number 69 of 2024 Concerning the Grant of Reduction Facility for Corporate Income Tax” 2024). The PMK also regulates the rate variation given according to the investment value paid.

The tax holiday facility is also given specifically to investment in the Nusantara Capital region (‘IKN’), as an investment stimulus to possibly encourage growth and development in the region. The tax holiday offered is also specific to several sectors that the government wishes to support. For instance, banks and insurance companies that intend to invest in the financial center sector of the IKN will obtain a tax holiday rate of 100% for 25 years, while other sectors will only obtain a rate of 85% for 25 years.

The sectors supported by this tax incentive are largely similar, namely, they operate in the pioneer sector (Susilo 2024). One of the sectors obtaining special attention in both Indonesia and Vietnam is green investment, with both countries enacting a tax holiday for companies operating in the field of renewable energy production or resulting in products with a minimum impact on the environment in order to expedite the growth of green investment while supporting their sustainability agendas. Several other types of tax incentive are available in Indonesia.

Tax allowance facilities are imposed on domestic taxpayers (‘WPBDN’) by Article 408 of PMK 81/2024. These facilities may be claimed when WPBDN have met their tax obligations, entered into a new investment, expanded their businesses within Indonesia’s Standard Industrial Classification (‘KBLI’), and fulfilled the investment value requirements, absorption of human resources, and local components following the Minister Regulation for each business sector. The investors may request a tax allowance themselves through the Online Single Submission (‘OSS’) system. Investment allowance grants are further regulated by Article 423 of PMK 81/2024. In general, this facility is given to the labor-intensive industrial sector, consisting of 17 industrial groups and 45 business fields (KBLI), to absorb more human resources and increase national economic growth. This facility must fulfill several requirements: among others, have a WPDN in the form of an entity, make an investment in the KBLI field stipulated in PMK 16/2020, and employ a minimum of 300 Indonesian human resources. Investors fulfilling such requirements will obtain an investment allowance rate of 60%, which will be payable at 10% each year for 6 years.

Tax facilities in the Special Economic Zone are a tool to attract investment and attempt to increase the national economy through human resources absorption in a certain region (“Preamble, Consideration of Letter A, Regulation of Minister of Finance of the Republic of Indonesia Number 237/Pmk.010/2020 Concerning Taxation, Customs and Excise Treatments in the Special Economic Zone” 2020). Facilities granted may be in the form of tax holidays or tax allowances, with different requirements. The difference between such requirements lies in the facility recipient and the conditions that must be met. Additional requirements may also be regulated; for example, business actors that have obtained one of the facilities are not allowed to claim other tax facilities.

The validity of these regulations as recently as 2024 indicates that taxation policy remains Indonesia’s mainstay for providing stimulus for investment activities and the government consistently employs tax incentives to maintain investment appeal for business actors and foreign investors, with the various regulations issued confirming that fiscal incentives are still considered the main instrument in attracting capital inflows. This situation shows that taxation continues to be a central element in Indonesia’s economic development strategy.

Enforcement of tax incentives in the pioneer industry is proven to have a significant implication for green investment growth in Vietnam. The United Vietnam ESG Equity Fund, or the UVEEF, had increased its assets by as much as 5.5 times compared to 2017 at the time of its launch (Việt Nam News 2024), which proves how the implementation of the tax incentive scheme has succeeded. The UVEEF is an equity mutual fund focusing on sustainable investment and selection processes considering criteria relating to areas such as Environment, Social, and Governance (‘ESG’) (Ibid.). In 2023, the UVEEF had a positive performance with a 17.7% net value growth of assets, surpassing the CN-Index increase within the same period (Ibid.). Such achievements prove that ESG-based mutual funds have great potential and may incite high interest from investors in the field of environment and sustainability.

Aside from tax incentives, Vietnam has also provided non-fiscal incentives for investors, including, among others, sufficient infrastructure development, good-quality labor training, and ease of licensing management (Nam 2024). The Vietnamese government is also active in promoting the transfer of technology and knowledge so that investors may upgrade the competitiveness of their products (Ibid.). Vietnam also offers a supportive environment for startup company development, by providing incubation and acceleration programs (Ibid.), with the government also bridging the collaboration between startups and big companies, along with other proponent facilities thereto (Ibid.).

Similarly to policy frameworks in Indonesia and Vietnam, Japan also uses tax incentive policies as a strategy to support the investment climate. In Japan, pioneer sectors such as digital transformation, investment in special regions, research and development activities, and environment-friendly and carbon-neutral energy have become the priority in the tax incentive program (Japan External Trade Organization 2025). This is in line with the commitment of the Japanese government to achieve Carbon Neutrality by 2050.

As a real manifestation of its commitment, the Japanese government has allocated as much as JPY 2 trillion through the “Green Innovation Funds” program, managed by the New Energy and Industrial Technology Development Organization (“NEDO”). This program has a mission to encourage innovation and investment in clean technology to expedite the transition to a low-carbon economy. The funds are budgeted to design research and development for environment-friendly technology and technology implementation, which has already been planned on a wide scale, as well as to invest in the field of technology and sustainable production processes.

However, despite all three governments using tax incentives to attract investment, striking differences can be seen in the incentive models of Japan, Indonesia, and Vietnam. The incentive coverage provided by Japan varies depending on tax credit, accelerated asset depreciation, and subsidized interest rate. Companies investing in the aforementioned sectors may obtain tax facilities in the form of a tax deduction amount payable if they purchase environment-friendly production equipment or implement a more efficient production process. Companies may also enjoy fixed asset depreciation related to environment-friendly investment, reducing their tax loads. Lastly, companies that have a long-term plan to reduce carbon emissions may apply for a loan with a lower interest rate as a subsidy from the Japanese government.

As a developed country, Japan has reached a more advanced stage compared to Indonesia in preparing their agenda for implementation of the Two-Pillar Solution (OECD 2025). A massive reformation of domestic tax regulation was validated in 2023, after going through a discussion process within the Japanese Parliament in 2022 (EY Global 2023). This reformation entails Japan’s effort to align its tax policies with the OECD’s Pillar Two provisions, particularly related to the Income Inclusion Rule implementation for MNE companies (Ibid.). On 13th September 2024, the Japanese government issued a Q&A document that has been renewed to support the implementation of Pillar Two in its state (Orbitax 2024). This document elaborates on the concrete efforts Japan has made to implement the GMT, including revisions to its domestic tax law, the IIR technical element, and UTPR drafting (Ibid.).

3.3. GMT Adoption Process Timeline in Indonesia

Like Japan, Indonesia has also shown its seriousness in adopting GMT through a clear framework, taking a significant first step by reforming its national taxation system. The positive law in Indonesia has accommodated several regulations allowing the adoption of GMT in domestic law. In the last few years, the Indonesian government has rigorously reformed its tax regulations, one of which is the enactment of the Law of Income Tax in Law Number 7 of 2021 concerning the Harmonization of Tax Regulation (‘UU PPh’). This law opened pathways for the state to acquire taxes from various digital economy activities, particularly during the COVID-19 pandemic.

Article 32A of the UU PPh delegates authority to the government to draft and perform agreements and tax consensus with partner states or jurisdictions. This delegation aims to prevent the tax basis erosion and profit shifting usually performed by multinational companies. More specifically, Article 49 letter f of Government Regulation Number 55 of 2022 delegates the authority to participate in agreements and/or consensus in the field of taxation, to overcome the implications of economic digitalization. Further, Article 52 of PP 55/2022 affirms the authority of the Directorate General of Taxation (‘DJP’) as a body authorized to take care of taxes in Indonesia to perform the provisions of such agreements or consensus in the field of taxation. This will be conducted alongside the authorities from partner countries to cope with the implications of economic digitalization or any other profit shifting that might occur. The delegation measures given to these authorities respond to the challenges of digital economy taxation involving two or more countries (Astuti 2024). PP 55/2022 also specifically stipulates the legal basis to apply GMT in Indonesia through Article 54.

In addition to regulation reform, the Indonesian government also conducted an analysis concerning the impact of GMT implementation on the tax incurred by multinational companies in Indonesia in 2023. In 2024, further action was committed to such analysis through the arrangement of the Draft Regulation of the Minister of Finance concerning Imposition of Global Minimum Tax, to ensure the enactment of consistent and effective regulations. The effort will be finalized gradually, with the IIR and QDMTT being made applicable in 2025, and an analysis of new incentives to attract investment will be performed (OECD 2023). Afterwards, in 2026, Indonesia will implement the UTPR to complete the whole GMT mechanism.

The regulation reform and continued efforts mentioned above have proven that the Indonesian government is making concrete progress in their preparation to implement the Two-Pillar Solution agenda, notably, the GMT (OECD 2025). The regulations reflect Indonesia’s commitment to adopting the Two-Pillar Solution as a way to address the various implications of a digital economy. The GMT implementation timeline potentially creates strategic challenges for the government in protecting foreign investment attractiveness while at the same time maintaining state revenue through tax. To implement GMT, the government needs to make a careful plan, bearing in mind that tax incentives are still the main stimulus for encouraging investment in Indonesia. It is important for the government to develop an alternate strategy to attract investment, instead of relying solely on tax incentives, that can operate in line with the GMT implementation to maintain Indonesia’s charm as an investment destination without sacrificing tax revenue potential.

The tax incentive schemes in the GMT implementation agenda in Indonesia are still under discussion. One of the schemes discussed is the grant of compensation for taxes previously paid by an MNE for its business activities in Indonesia (Ichwan 2024). In accordance with the effort of Indonesia’s government to encourage green investment, the grant of compensation that may be implemented is related to the protection, preservation, and recovery of the environment. For example, the government may use tax funds to support the recovery of the environment and manage carbon pollution resulting from the MNE’s production activities (Ibid.). Furthermore, the government may also consider the incentive grant models that have been implemented by other states. Many states use non-taxation schemes to attract foreign investors, for example, schemes to grant Qualified Refundable Tax Credit (‘QRTC’), Marketable Transferable Tax Credit (‘MTTC’), profit from the sale of previously reinvested fixed assets, and cash subsidies (Astuti 2024).

3.4. Tax Incentive Reform Strategy in Indonesia Relating to the GMT Implementation Agenda

The GMT implementation agenda is forcing Indonesia to quickly align domestic tax regulation with the consensus principles previously agreed. The effect of this alignment to adapt to the current global condition will cause massive changes in the substance of the UU PPh, particularly the UU PPh for entities in Indonesia.

One of the reforms that Indonesia may adopt is the Qualified Domestic Minimum Top-Up Tax (QDMTT). The QDMTT is a domestic minimum tax that may be imposed on MNEs to enable Indonesia to levy the top-up taxes supposedly collected by other states (OECD 2023). When Indonesia adopts QDMTT in its domestic law, it may maintain its tax revenue and mitigate GMT’s negative effects on incentive policies such as tax holidays. QDMTT will be very beneficial for Indonesia’s finances, since it can add to state revenue through taxes.

Another considerable step is a complete reform of tax incentive policies. Tax incentive grants may need to be adjusted to be more focused on expense-based incentives, such as research and development, instead of income-based incentives, which are most likely affected by GMT. Policy reform is highly necessary, since it may affect foreign investors’ interest in injecting capital in Indonesia. When the GMT is fully enforced, MNEs will not view tax relief as the main appeal, as the benefit may be traded off with their tax obligations in other jurisdictions.

Currently, the Investment Coordinating Board and the Ministry of Finance are collaborating to study fiscal and non-fiscal incentive alternatives that may be granted to stimulate foreign investment in Indonesia (Apriandi 2024). Providing fiscal incentives amidst the challenges of the GMT implementation agenda is still under discussion due to Indonesia’s shortcomings, with tax incentives being just one of many potential investment stimulus schemes (Pohan et al. 2021). For several states, such as New Zealand, tax incentives are no longer in use (Apriandi 2024), but, in Indonesia, tax incentive schemes are unfortunately still viewed as a hugely successful way to attract foreign investors. This is mainly due to Indonesia’s lack of preparation in other areas, such as infrastructure, supporting supply chains (Ibrahim 2024), bureaucracy, and regulation. These shortcomings are forcing Indonesia to keep using tax incentives as tools to attract investment (Ibid.).

In reality, the global view is that Indonesia no longer needs to provide tax incentives to attract investment, since it already has vast market availability and abundant natural resources (Setyobudi 2024) and that all this time Indonesia has been losing potential state revenue by giving tax incentives to business actors (Ibid.). Hence, the government has now started to plan non-fiscal incentives as a strategic move to attract investment to Indonesia.

The GMT implementation plan has changed the strategies of states to attract investment, with the enactment of the GMT rate provision of 15% making many states now focus on providing other, more effective facilities. Taking into consideration Vietnam and Japan’s efforts in attracting foreign investors’ interests, ease of business activities, and sufficient infrastructure may be a good move. Indonesia may imitate the two states’ efforts by providing training to human resources to produce good-quality labor, increasing infrastructure to ease business activities, and simplifying the licensing process.

In Indonesia, the licensing process is often considered complex and costly, making tax incentives the easiest solution to attract investors (Astuti 2024). However, since the GMT agenda may decrease the efficacy of tax incentives, the government should be shifting its focus to developing and improving other areas that may support investment growth in Indonesia. Programs such as the OSS aiming to ease the licensing process show huge potential for creating a more conducive investment climate if implemented correctly. Thus, instead of continuously relying on tax incentives, the government needs to prioritize non-tax facility procurement, including license simplification, to increase Indonesia’s competitiveness at the global level (Astuti 2024). This shift in focus will both reduce obstacles for investors and create efficiency in the bureaucratic system. This is in line with the global trend, which prioritizes non-tax aspects such as sustainability and regulatory stability as an investment stimulus.

From a legal perspective, GMT is a product resulting from the OECD consensus. In other words, GMT may be categorized as an international agreement. In Indonesia, international agreement is considered one of the national sources of law (International Court of Justice n.d.), with the creation and ratification of an international agreement between the government of the Republic of Indonesia and other states, international organizations, and other international law subjects constituting a crucial legal act. In domestic law, both will bind a state to obligations in certain fields, ensuring its arrangement is mandatorily conducted by adhering to a clear and strong basis and by using obvious instruments and rules and regulations. The integration of GMT into the national tax system needs to be performed carefully and consistently with the tax reformation agenda (Gunandi 2025). Both are required to create legal certainty, increase compliance, and maintain a balance between the need for state revenue and business activity performance (Ibid.).

The domestic implementation of the principles or provisions of an international agreement usually requires ratification. However, in some cases, the execution of a certain agreement within the law of a state does not mandatorily need ratification. Provisions related to the ratification of international agreements are adjusted in each case. In addition to ratification, other usable mechanisms to show approval of and commitment to international agreements are accession, acceptance, and consent (“Article 12 Paragraph (1) Letter b Vienna Convention 1969” 1969). A mechanism shall be obligatory if the agreement that shall be adopted stipulates a certain required mechanism. In terms of GMT adoption, further analysis related to the most suitable mechanism must be conducted.

State sovereignty theory is a justification for a state to levy taxes. The state shall have an exclusive right to collect taxes if the constitution of the state delegates the tax collection authority through the laws (Jaja 2005). Sri Soemantri argues that each state must have its own constitution or fundamental laws as the main pillar to support the nation’s life (Soemantri 1979). The two have an inseparable relationship; the state will stand through its constitution (Ibid.). This view is in line with the argument of Jimly Assidiqie, quoted from Thomas Paine: the constitution is made by people to form governance (Asshidiqie 2007).

Tax collection through laws has two roles: first, as a controlling instrument for individual behavior for collective interests, and, second, as the main mechanism to accumulate funds in a fair manner and support national welfare (Ibid.). The first legal basis of tax collection in Indonesia is stipulated in Article 23 paragraph (2) of the 1945 Constitution of the Republic of Indonesia (‘1945 Constitution’). It states that all taxes for state necessity shall be based on laws. The formulation was then changed through the third amendment in Article 23A of the 1945 Constitution, where it is stipulated that laws shall only regulate taxes and other compulsory levies for state necessities. Article 23A of the 1945 Constitution both serves as the legal basis of tax collection and implies a philosophy of tax (Soemitro 1992) with several meanings.

First, tax collection and other compulsory levies such as excise, customs, and retribution must be conducted under a legal basis in the form of law. This means it will firstly obtain approval from the people, taking into consideration that tax comprises the transfer of wealth from the people to the state. Without contraception that may be directly appointed, this transfer of wealth may possibly be viewed as forceful robbery, seizure, or theft, or a voluntary and altruistic gift (Soemitro 1990). Thus, to prevent tax being categorized as a robbery or grant, approval from the people is required through the People’s Board of Representatives (“Article 20 Paragraph (1) Constitution of the Republic of Indonesia 1945” 1945).

Second, according to the 1945 Constitution, before and after the amendment, the obligation of tax collection based on laws recognizes democratic institutions as the manifestation of the people’s sovereignty (Djafar Saidi 2007). In democratic states, as well as shouldering tax collection collectively, people are also jointly involved in determining its purpose and performing governance. Meticulous observation of the explanation of Article 23 of the 1945 Constitution prior to the amendment gives justification for such consideration, where it says that “… in the name of people’s right of self-determination, all acts putting a burden to the people, such as taxes and others must be stipulated under the law.”

Third, tax collection is an absolute right of a state (Brotodihardjo 2010). This means that only a state is authorized to collect taxes from its people. No other social organization in the state in question shall have the right to collect taxes, including the relevant social organization (Ibid.). The authority to collect tax is a unique characteristic not owned by other types of organizations; it is attached to each sovereign state.

The people’s sovereignty (“Article 1 Paragraph (2) Constitution of the Republic of Indonesia 1945” 1945), Indonesia as a state of law (“Article 1 Paragraph (3) Constitution of the Republic of Indonesia 1945” 1945), and the authority of the People’s Board of Representatives to form the law (“Article 20 Paragraph (1) Constitution of the Republic of Indonesia 1945” 1945) all become juridical bases of tax collection in Indonesia. This gives a mandate that tax collection must be based on consent from the people as the holders of sovereignty and represented by the People’s Board of Representatives. As it says—no taxation without representation. Fairness and legal certainty also become primary pillars in tax collection. The state cannot collect taxes without a legal basis derived from the law (Soemitro 1990, p. 141). Arrangement in the form of law reflects the necessity and desire to achieve a civilization or order for innovation or development (Kusumaatmadja n.d.).

The a quo condition shows that several regulations have become the legal basis of GMT implementation in Indonesia, including the PMK 69/2024. Essentially, the PMK 69/2024 stipulates clauses on tax holidays for taxpayer entities covered in the GMT provisions. Article 15A of the PMK 69/2024 generally regulates top-up tax for tax holiday facilities of multinational companies fulfilling the requirements of the GMT provisions. This article reflects the arrangement of the taxpayer criteria that will be affected by the top-up tax provisions. As explained above, categorization of taxpayers is a material provision that must be regulated within the law. In other words, the PMK 69/2024 is contrary to the philosophical basis of tax collection.

In addition, other laws—namely, the Regulation of the Minister of Finance Number 136 of 2024 concerning Global Minimum Tax Handling According to International Consensus (‘PMK 136/2024’)—have been enacted as a form of adoption of the OECD consensus in Indonesia. The main focus of this PMK is implementing a minimum tax rate of 15% for multinational companies with a global consolidated annual revenue exceeding EUR 750 million, equivalent to IDR 12.5 trillion (Pramasanti 2025). This regulation is aimed at preventing the practice of tax evasion by legal subjects in Indonesia through the transfer of wealth to a jurisdiction with a low tax rate. This provision indicates the urgent need for a balance between compliance with international consensus and the sustainability of the domestic investment climate, which demands a fiscal incentive adjustment strategy to make each state more competitive (Ibid.). The technical arrangement of the GMT mechanism, including the IIR, UTPR, and QDMTT schemes in this PMK, clarifies that the PMK 136/2024 functions as an instrument to guarantee the tax contribution of multinational companies according to the global minimum rate applicable (Glorinus 2025).

The adoption of the OECD consensus through the PMK as its legal basis to implement the global minimum tax in Indonesia has been considered by critics as a controversial step. As elaborated above, the GMT provisions stipulated in the form of the PMK do not harmonize with the philosophical basis of tax collection in Indonesia, particularly the “no taxation without representation” principle (Nugroho 2024). Although Article 32A of the UU PPh and Article 49 letter f of the PP 55/2022 have been cited as the basis of GMT adoption in Indonesia, the two rules and regulations do not cover the substance of the GMT that will be enacted (Astuti 2024). To implement the philosophical basis of tax collection, one must reflect both the formal and material substance of the regulation in its action.

Article 32A of the UU PPh and Article 49 letter f of the PP 55/2022 are indeed related to the GMT provisions; however, considering the formulation of the articles and their explanations, the content of the provisions gives the Indonesian government authority to enter into a tax agreement with other state instead. It does not contain regulations on how GMT should be implemented in Indonesia, i.e., it does not specify whether there will be new taxpayers, or whether other new provisions will be required when the GMT is enacted in the future. Will there be tax subject criteria that must be formulated? Are there any changes to the provisions on tax objects in terms of type, criteria, or activities? What conditions affect the tax subject affected by the GMT imposition? All references to the GMT consensus will certainly need new regulation; since those provisions fall under the material components of tax regulation, they must be stipulated at the level of law.

Take, for example, Japan, which, in applying the Pillar Two or GMT, has reformed its national and international rules and regulations in the field of taxation, both in terms of technical and substantive provisions. As such, to ensure investment stability and enhance competitiveness, Indonesia will face a great challenge in closing the global gap after the GMT has been adopted. PACIS UNPAR states that, aside from building a sturdy legal framework to deal with the negative impact of GMT, Indonesia will need to maintain its original charm for investors (Hermawan 2024). Possible strategic steps that may be taken by Indonesia include enhancement of the national tax system, infrastructure improvement, and policy reformation, which will help increase investment ecosystem competitiveness. The readiness of the national taxation administration system, which also plays an essential role, must also be taken into consideration, and its reporting, compliance, and supervision systems effectively implemented without causing distortion to the national economy.

4. Closing Remarks

The GMT implementation agenda creates both challenges and opportunities for Indonesia in sustaining investment stability and global competitiveness. Thus, tax facilities, such as tax holidays, will no longer be relevant in the GMT era. The government needs to design a comprehensive regulation to support the preparation timeline for GMT implementation in Indonesia. Domestic regulations need to adhere to the GMT principles, and, thus, the adoption of QDMTT, IIR, and GMT principles may be the right choice for Indonesia.

On the other hand, the government also needs to form incentives outside of taxation that are capable of attracting foreign investors to the domestic regime. This will allow Indonesia to relinquish its attachment to tax incentive grants as an investment stimulus. Enhancement of infrastructure, supply chains, and the business licensing process may become the key to increasing investment. Indonesia should emulate Vietnam in providing non-fiscal facilities for investors, including adequate infrastructure development, quality workforce training, and ease of permit management.

In addition, the government also needs to strengthen its national legal framework. Technical regulations such as the PMK must be supported with a strong juridical basis. Indonesia needs to learn from the strategic steps that have already been taken by Japan, which has created a stable investment ecosystem with clear regulations. In this sense, the author considers GMT adoption at the law level to be the right choice for Indonesia.

As the discussion of GMT is still ongoing at both the global and national levels, it is necessary to continuously research investment policy measures and tax reform. This review is important for the formation of regulations that are adaptive to the ever-evolving dynamics while simultaneously providing legal certainty for investors. In this way, Indonesia is expected to maintain its competitiveness in the global arena and attract foreign investment flows in a sustainable manner.