Joint Ventures and The Impact on Global Minimum Tax Calculation

The existence of global-scale joint ventures in Indonesia is facing new challenges. The issuance of Minister of Finance Regulation (PMK) No. 136 of 2024 (PMK 136/2024) requires them to comply with the Global Anti-Base Erosion (GloBE) rules.

In fact, joint ventures play a crucial role in the global economic landscape. By combining resources, expertise, and market access from various entities, joint ventures create significant opportunities for growth and innovation.

A joint venture is defined as an entity whose financial position is reported in the consolidated financial statements of the ultimate parent entity using the equity method. Under this method, the parent entity records only its share of the joint venture’s profits or losses based on its ownership percentage, without directly recognizing the joint venture's financial results.

To qualify as a joint venture, the ultimate parent entity must hold at least 50% direct or indirect ownership. This structure allows the joint venture to operate as a separate entity while still reflecting a financial relationship with its parent entity.

Regulation on Joint Ventures and Joint Venture Subsidiary

With the implementation of GloBE rules, joint venture companies and their subsidiaries, or joint venture subsidiaries, will be subject to the top-up tax mechanism. As a result, both joint ventures and joint venture subsidiaries must navigate two main scenarios.

First, joint ventures and joint venture subsidiaries will be treated as separate constituent entities within the MNE Group. In the second scenario, the joint venture is considered the ultimate parent entity of the MNE Group.

Top-Up Tax Implementation

In practice, the top-up tax imposed on a joint venture group must be reduced by the portion allocated to each parent entity through the Qualified IIR (Income Inclusion Rule).

If there is any remaining top-up tax that is not allocated through IIR, it will be calculated using the UTPR (Undertaxed Payment Rule) mechanism. This mechanism ensures that the top-up tax is fairly distributed among the countries where the joint venture operates.

Additionally, joint venture subsidiaries also have the same obligations. Their financial statements must be consolidated according to applicable Financial Accounting Standards, ensuring that the top-up tax calculation is conducted accurately.

READ: Constituent Entities Exempted from GloBE Rules under PMK 136/2024

Exceptions to the Joint Venture Rules

However, not all entities are classified as joint ventures. Some exceptions include:

1. The Ultimate Parent Entity of an MNE Group subject to GloBE.

2. Entities excluded under Article 3(1) of PMK 136/2024.

3. Entities directly owned by the MNE Group through an excluded entity, if:

• They operate almost exclusively to hold assets or investments for investors.
• They conduct supporting activities for an excluded entity.
• The majority of their income is excluded from GloBE profit/loss calculations.

4. Entities entirely composed of excluded entities under Article 3(1) of PMK 136/2024.

5. Joint venture subsidiaries, if:

• They are consolidated by the joint venture under an Accepted Financial Accounting Standard.
• They are required to be consolidated under that standard.

READ: PMK 136/2024: Safe Harbour Provisions in the Transitional Period of GloBE Rules

Implementation of GloBE for Joint Venture Groups

An example of GloBE application to a joint venture group can be found in the appendix of PMK 136/2024. The following is an illustration:

1. The Ultimate Parent Entity holds a 50% ownership stake in JV Co.
2. JV Co holds an 80% ownership stake in Eda Co.
3. JV Co and Eda Co are low-taxed entities, each subject to a top-up tax of EUR 100.00.

Top-Up Tax Calculation:

1. Top-Up Tax from JV Co allocated to the Ultimate Parent Entity:

• 50% x EUR 100.00 = EUR 50.00

2. Top-Up Tax from Eda Co allocated to the Ultimate Parent Entity:

• 50% x 80% x EUR 100.00 = EUR 40.00

Total Group Top-Up Tax:

• EUR 90.00 (EUR 50.00 from JV Co + EUR 40.00 from Eda Co)

Conclusion

With the implementation of GloBE, joint venture groups face new challenges in calculating top-up taxes. This regulation requires strict compliance with rules such as Qualified IIR and UTPR, while also ensuring that all financial reports are consistent with applicable accounting standards.

For more information, please contact the Transfer Pricing Division of MUC Consulting at ask_muc@muc.co.id. The Transfer Pricing Division of MUC Consulting is supported by professionals with extensive experience in handling transfer pricing disputes and has received recognition from various professional organizations, including the Certificate of Professional Training in Fundamentals of GloBE Rules - Pillar Two. This certificate was awarded for participation in training related to GloBE rules from IBFD.