In essence, the challenges faced by developing countries, particularly Indonesia, in response to Pillar Two are multi-layered. From grappling with the intricacies of the Subject To Tax Rule to managing the implications on existing bilateral agreements, these challenges necessitate a nuanced and strategic approach for effective implementation. Developing nations, including Indonesia, find themselves at the forefront of adapting to this transformative shift in the global taxation paradigm.
Options for Indonesia: Crafting a Strategic Response to Pillar Two
1. Withdraw All Profit-Linked Incentives/Tax Holidays:
Benefits:
Aligning with the core objectives of Pillar Two, the option to withdraw all profit-linked incentives and tax holidays ensures a direct imposition of a minimum tax on global profits. This approach strengthens Indonesia's commitment to international tax standards, fostering a tax environment where businesses contribute equitably.
Drawbacks:
However, the potential drawbacks are significant. Such a move might impact Indonesia's attractiveness as an investment destination, potentially deterring foreign businesses seeking favorable tax conditions. The challenge lies in striking a balance between compliance with Pillar Two and maintaining a competitive edge to attract investments crucial for economic growth.
2. Introduce an Alternate Minimum Tax:
Benefits:
Introducing an alternate minimum tax provides Indonesia with the flexibility to retain certain incentives while establishing an alternative framework. This option recognizes the need to balance competitiveness with tax integrity, offering a middle ground that accommodates Pillar Two objectives without entirely sacrificing existing advantages.
Drawbacks:
