Indonesia signs Subject to Tax Rule

       

The Subject to Tax Rule (STTR) is one of three instruments under Pillar 2 aiming at minimizing tax avoidance practices. The STTR grants jurisdictions the right to impose an additional tax of 9 % on certain income payments made between related parties. This additional tax applies to specific income that is either untaxed or taxed at a rate of less than 9 %. 

     

The STTR is implemented on transactions conducted by related parties or connected persons. Entities and persons are considered related or connected if they are under common legal control, both direct or indirect ownership of more than 50 %, or based on other relevant facts and circumstances. 

     

The STTR applies to the following types of “covered income”: 

     

The STTR will only apply if the total amount of covered income generated in the source country and paid to related parties in the resident state exceeds a materiality threshold of EUR 1 million or EUR 250,000 per year. For Contracting States with a GDP equal to or greater than EUR 40 billion, the threshold will be EUR 1 million. For Contracting States with a GDP of less than EUR 40 billion, the threshold will be EUR 250,000.

     

Furthermore, aside from interest and royalties, the STTR is applicable only when the covered income received by the recipient exceeds the relevant costs incurred in earning that income, plus a mark-up of 8.5 %. Indirect costs, which are costs not directly tied to a specific transaction, also need to be factored into this calculation to determine the total cost basis.

      

​However, the STTR does not apply to recipients in the following categories: 

      

Indonesia’s signing of the MLI STTR reflects its commitment to enhancing fairness and transparency in global economic cooperation. According to Sri Mulyani, one of the problems that the world is currently facing is unfair competition for tax rates. Indonesia, as one of the developing countries, is affected because such competition leads to significant losses in potential tax revenues. The MLI STTR is considered to be one of the keys to overcome this challenge by ensuring that cross-border income is taxed in a fair manner.

     

This initiative aims at creating a level playing field between local and multinational companies, ensuring that local businesses can compete effectively in the market. Additionally, it seeks to strengthen anti-tax avoidance measures within Indonesia’s tax system, providing the government with greater fiscal capacity to address other macroeconomic challenges. The MLI STTR provisions will be integrated in Double Tax Avoidance Approval ("P3B") simultaneously and systematically without going through bilateral negotiations. The implementation of this instrument is expected to have an impact on 29 P3B of Indonesia and partner countries. As with other international agreements, the implementation of the MLI STTR is carried out after going through a ratification process in accordance with applicable provisions.

 

The legal basis for the implementation of STTR in Indonesia refers to Law No. 7 of 2021 concerning the Harmonization of Tax Regulations, and Government Regulation No. 55 of 2022 which serves as a guideline for the GloBe and Commentary Model Rules. The implementation of STTR in Indonesia will take effect in 2026 at the earliest, but previously the government will implement QDMTT (Qualified Domestic Minimum Top-Up Tax) in 2025.

       

Through the implementation of STTR, Indonesia hopes to prevent tax evasion by large companies and to increase state revenue. The existence of this rule will encourage multinational companies to be more attentive in managing cross-border revenues and to adjust their tax strategies to remain compliant with applicable rules.

STTR’s implementation adds a new layer of compliance that could impact tax liabilities on intra-group payments. As a result to this rule, companies need to carefully evaluate their current tax structures and cross-border intra-group payment arrangements to identify potential STTR exposures. Such measure is crucial to maintain tax efficiency and avoid unforeseen costs. 

    

Our team is equipped to support your business by reviewing the compliance status and ensuring that the arrangements align with the recent regulatory requirements. For an in-depth discussion and tailored solution of how STTR might affect your business, please contact us.