Litigating Indonesia's Pillar Two (income Inclusion Rule): a Tax Court Playbook for 2026

Last updated: May 18, 2026

Indonesia’s adoption of the global minimum tax framework has moved from policy paper to audit reality. The income inclusion rule Indonesia now applies to multinational enterprise (MNE) groups with consolidated revenue of at least EUR 750 million, obliging Indonesian ultimate parent entities, and, in certain structures, intermediate parent entities, to pay a top-up tax on low-taxed constituent entity income anywhere in the group. With the Directorate General of Taxes (DGT) issuing PER-6/PJ/2026 to formalise administrative filing requirements, and the Ministry of Finance’s implementing regulations already in force, the first wave of IIR assessments is creating urgent litigation choices for in-house tax directors and their advisers.

This article provides a practical Tax Court playbook: when to challenge an IIR assessment, how to navigate Indonesian tax court procedures, and which legal defenses carry the greatest tactical weight in 2026.

The Income Inclusion Rule Indonesia: When to Litigate and When to Accept

Yes, taxpayers can and should evaluate litigation for selected IIR assessments. The Indonesian Tax Court has jurisdiction over disputes arising from tax assessment notices (Surat Ketetapan Pajak), including assessments grounded in the Pillar Two regulations. However, not every assessment warrants a courtroom challenge. The decision to appeal a tax assessment in Indonesia should be driven by three interlocking considerations.

• Size of the adjustment. If the top-up tax at stake is material relative to the group’s global tax position, industry observers generally cite thresholds above IDR 10 billion as warranting serious litigation analysis, the economics justify the cost of a Tax Court appeal, expert witnesses, and cross-border coordination with group counsel.
• Nature of the legal question. Disputes that turn on novel interpretive questions, such as whether GloBE income has been correctly computed, or whether a particular entity qualifies as a constituent entity under Indonesia’s regulations, present stronger litigation candidates than purely computational disagreements that can be resolved administratively.
• Strategic and cross-border implications. An IIR assessment in Indonesia can trigger corresponding adjustments in other jurisdictions. MNEs must consider whether a successful challenge in the Tax Court would be recognised abroad, whether treaty relief is at stake, and whether the assessment creates double-taxation exposure that can only be resolved through litigation or a mutual agreement procedure (MAP).

Before deciding to litigate the global minimum tax in Indonesia, assemble a core document package: a detailed legal memorandum analysing the DGT’s assessment basis, consolidated financial statements for all relevant constituent entities, transfer pricing documentation supporting jurisdictional profit allocations, and evidence of the group’s effective tax rate (ETR) calculations under the GloBE rules. This package forms the evidentiary backbone of any subsequent objection or appeal.

What the Income Inclusion Rule Is and How Pillar Two Indonesia Works

The Income Inclusion Rule is one of the three interlocking charging mechanisms under the OECD/G20 Pillar Two framework, designed to ensure that large MNE groups pay a minimum effective tax rate of 15 per cent on income in every jurisdiction where they operate. Under the IIR, the parent entity of an MNE group is required to calculate the ETR for each jurisdiction in which the group has constituent entities. Where the jurisdictional ETR falls below 15 per cent, the parent entity pays a top-up tax sufficient to bridge the gap.

The IIR takes priority in the Pillar Two ordering rules: it applies before the Undertaxed Profits Rule (UTPR) and is reduced to the extent a jurisdiction applies a qualifying Domestic Minimum Top-up Tax (DMTT).

Indonesia has adopted all three components, IIR, UTPR, and DMTT, through a series of Ministry of Finance regulations and DGT administrative directives. The Directorate General of Taxes confirmed Indonesia’s implementation in official communications, positioning the country as an early adopter among ASEAN economies.

Key Regulatory Instruments and Dates

Interaction Between the IIR, DMTT and UTPR

Understanding how these three mechanisms interact is essential for any litigation strategy. Indonesia’s DMTT is designed to operate as a first line of collection: where Indonesia itself is a low-taxed jurisdiction for a particular constituent entity, the DMTT allows Indonesia to collect the top-up tax domestically before any foreign parent applies the IIR. From a litigation perspective, this means a taxpayer challenging an IIR assessment must first confirm whether DMTT has already been applied to the relevant jurisdiction, a double collection would be a strong ground for objection. The UTPR, meanwhile, operates as a backstop where no qualifying IIR or DMTT applies.

Early indications suggest that the DGT is focused on IIR enforcement for Indonesian-parented groups and DMTT collection for Indonesian constituent entities of foreign-parented groups.

Should You Challenge an IIR Tax Assessment? A Decision Framework

Not every IIR assessment deserves a fight. The decision to challenge an IIR tax assessment should follow a structured framework that weighs financial, legal, and procedural factors against the costs and risks of litigation.

Financial Thresholds

Begin with the economics. Calculate the total tax at risk, including the top-up tax itself, potential penalties, and administrative interest. Compare this to the estimated cost of the objection and appeal process, legal fees, expert reports, management time, and opportunity costs. Where the top-up amount is below the group’s materiality threshold and the legal issues are settled, accepting the assessment and focusing resources elsewhere is often the pragmatic choice. Conversely, where the assessment represents a significant proportion of the group’s Indonesian tax liability, the financial case for litigation strengthens considerably.

Legal Thresholds

Evaluate whether the dispute raises a genuine question of law or merely a factual or computational disagreement. Novel legal questions, the correct classification of a hybrid entity, the application of substance-based income exclusions, or the interpretation of the transitional safe harbour provisions, are more likely to succeed in the Tax Court than disputes where the DGT has simply applied settled rules to undisputed facts. Where the DGT’s assessment rests on an interpretation of GloBE Indonesia rules that departs from the OECD Model Rules Commentary, the litigation case is particularly strong.

Process and Strategic Thresholds

Consider timing and cross-border consequences. A Tax Court proceeding can take six to twelve months or longer. If the group is simultaneously facing related audits in other jurisdictions, or if a MAP request is pending, the timing of an Indonesian appeal must be coordinated carefully to avoid conflicting positions. Additionally, assess whether a successful challenge in Indonesia would be recognised by the UPE’s home jurisdiction, otherwise, the group may win in Indonesia but face offsetting adjustments abroad.

Pre-filing documentation checklist:

• Internal legal memorandum analysing the DGT’s assessment basis and identifying errors
• Consolidated financial statements for all relevant constituent entities
• GloBE ETR calculation workpapers by jurisdiction
• Transfer pricing documentation supporting profit allocation
• Residence and entity classification evidence (certificates of incorporation, tax residence certificates)
• Correspondence with the DGT during the audit phase

How to Challenge an IIR Assessment: Indonesian Tax Court Procedural Roadmap

The procedural pathway for disputing an IIR assessment in Indonesia follows the same general framework as other tax disputes, governed by Law No. 14 of 2002 on the Tax Court (Pengadilan Pajak). However, the novelty of Pillar Two assessments introduces specific tactical considerations at every stage. Understanding Indonesian tax court procedures is essential for any multinational preparing to appeal.

Pre-Litigation: Administrative Objection

Before filing an appeal with the Tax Court, a taxpayer must generally first submit an administrative objection (keberatan) to the DGT. This objection must be filed within three months of the date the assessment notice is issued. The objection letter must clearly state the grounds for dispute, the amount of tax contested, and the legal and factual basis for the taxpayer’s position. This stage is not merely procedural, it is a substantive opportunity to resolve the dispute without litigation and to establish the evidentiary record.

The DGT is required to issue a decision on the objection within twelve months. If no decision is issued within that period, the objection is deemed accepted. In practice, the DGT almost always issues a decision. If the objection is rejected or only partially granted, the taxpayer may then appeal to the Tax Court.

Filing an Appeal in the Tax Court

An appeal (banding) to the Tax Court must be filed within three months of the date the DGT’s objection decision is received. The appeal is filed with the Pengadilan Pajak in Jakarta. The filing must include:

• A formal appeal letter (surat banding) in Bahasa Indonesia
• A copy of the DGT’s objection decision
• The original assessment notice
• Supporting evidence (financial statements, calculations, legal memoranda)
• Proof of payment of at least 50 per cent of the assessed tax amount (as a condition of admissibility in certain cases, confirm applicability for IIR assessments with local counsel)

The three-month filing window is jurisdictional, miss it and the right to appeal is extinguished. Industry observers expect the DGT to strictly enforce this deadline for IIR-related appeals, given the high-profile nature of Pillar Two compliance.

Evidence and Expert Reports

The Tax Court operates as a court of both law and fact, meaning it independently examines the evidence rather than simply reviewing the DGT’s administrative record. This creates opportunities for taxpayers to introduce new evidence and expert testimony that was not available during the objection phase. For IIR disputes, the critical evidence categories include:

• GloBE ETR calculations. Detailed jurisdiction-by-jurisdiction ETR workpapers, showing how the effective tax rate was computed for each constituent entity. Where the DGT has used a different calculation methodology, a comparative analysis is essential.
• Transfer pricing reports. Documentation supporting the arm’s-length character of intercompany transactions that affect jurisdictional profit allocation and, consequently, the ETR.
• Substance evidence. Payroll records, office lease agreements, board minutes, and other materials demonstrating real economic substance in jurisdictions where the DGT alleges undertaxation.
• Expert witness reports. Independent tax expert opinions on GloBE calculation methodology, the interpretation of OECD Model Rules provisions, and the proper application of safe harbour elections.

Hearing, Decision, and Post-Decision Remedies

Tax Court hearings are conducted before a panel of judges. The taxpayer and the DGT both have the right to present oral argument, submit written closing statements, and respond to the panel’s questions. Decisions are typically rendered within twelve months of the appeal filing, though complex cross-border disputes may take longer.

If either party is dissatisfied with the Tax Court’s decision, the remedy is a Judicial Review (Peninjauan Kembali) to the Supreme Court of Indonesia. This is not a full re-hearing; the Supreme Court reviews only questions of law, procedural errors, or newly discovered evidence. The practical effect is that factual findings by the Tax Court are difficult to overturn, making it critical to build a comprehensive evidentiary record at the Tax Court level.

Principal Legal Defenses Against Income Inclusion Rule Indonesia Assessments

The legal defenses available to taxpayers challenging IIR assessments draw on established principles of Indonesian tax law, adapted to the unique architecture of the GloBE rules. The following are the principal lines of attack that carry the greatest weight in 2026, as the DGT and the Tax Court develop institutional experience with Pillar Two disputes.

Transfer Pricing and Allocation Errors

The IIR top-up tax is calculated on a jurisdictional basis, meaning the allocation of income among constituent entities directly affects the ETR and, consequently, the top-up amount. Where the DGT has applied a different profit allocation than the one reflected in the group’s transfer pricing documentation, this creates a strong basis for challenge. Common arguments include:

• The DGT misallocated constituent entity income by applying domestic transfer pricing adjustments that are inconsistent with the GloBE rules’ own allocation methodology.
• The DGT failed to recognise adjustments required by the OECD Model Rules, such as the substance-based income exclusion (SBIE), which allows groups to exclude a portion of payroll costs and tangible asset carrying values from the top-up calculation.
• The DGT’s ETR calculation double-counted or omitted covered taxes that should have been included under the GloBE rules, producing an artificially low jurisdictional ETR.

Residence and Ultimate Parent Entity Issues

The IIR applies to the ultimate parent entity (UPE) of the MNE group, or, in certain circumstances, to intermediate parent entities. A threshold defense is to challenge whether the entity subject to the IIR assessment is in fact the UPE or a qualifying intermediate parent under Indonesia’s regulations. Where the group structure is complex (e.g., involving dual-resident entities, stateless entities, or entities in jurisdictions that have not adopted the IIR), the DGT’s determination of which entity bears the IIR obligation may be contestable.

Additionally, where the UPE is located in a jurisdiction that has itself adopted a qualifying IIR, the Indonesian entity should not be subject to a separate IIR charge, the top-down ordering rule prevents double application. Documenting the UPE jurisdiction’s IIR status is critical evidence.

Substance and Conduit Challenges

Some IIR assessments may target structures where the DGT alleges that constituent entities in low-tax jurisdictions lack genuine economic substance and function primarily as conduits. While substance-over-form arguments are well established in Indonesian tax law, applying them in the GloBE context requires careful navigation. The GloBE rules contain their own substance-based income exclusion (SBIE), which provides a formulaic carve-out rather than a qualitative substance test. A taxpayer’s defense should emphasise that the SBIE is the exclusive mechanism for substance-based adjustments under the IIR, and that the DGT cannot layer additional domestic substance requirements on top of the GloBE framework.

Statute of Limitations and Administrative Errors

Indonesian tax law imposes time limits on the DGT’s authority to issue assessments. A defense based on the statute of limitations requires careful analysis of when the IIR obligation arose, when the relevant tax return (or GloBE Information Return) was filed, and whether the DGT issued the assessment within the prescribed period. Given the novelty of GloBE filings, there may be genuine ambiguity about the commencement date of the limitation period, an issue the likely practical effect of which will be tested in the Tax Court in the coming years.

Procedural defects in the assessment process, such as failure to follow mandatory audit procedures, inadequate notice, or failure to provide the taxpayer an opportunity to respond during the audit, can also form the basis of a successful challenge, independent of the merits of the underlying tax calculation.

Double Tax Relief, Foreign Tax Credits and Treaty Considerations

One of the most complex areas of IIR litigation involves the interaction between the top-up tax and Indonesia’s bilateral tax treaty network. Where a Pillar Two assessment results in economic double taxation, for example, because the UPE’s home jurisdiction does not grant a credit for the Indonesian IIR top-up, the taxpayer may be able to invoke treaty protections or initiate a MAP. When litigating the global minimum tax, counsel should consider whether the IIR top-up qualifies as a “tax” covered by the relevant treaty, and whether the non-discrimination article or the mutual agreement article provides a basis for relief.

Practical Litigation Tactics and Settlement Alternatives

Litigation is not the only path forward. In many cases, a strategic combination of administrative engagement and negotiation will produce a better outcome than a full Tax Court proceeding. Even where litigation is ultimately necessary, early tactical decisions can significantly affect the outcome.

Evidence Preservation and Audit Management

The moment an IIR audit is initiated, implement a litigation hold across all relevant jurisdictions. This means preserving all GloBE calculation workpapers, intercompany correspondence, board minutes, and financial records that may be relevant to the ETR computation. Where the group’s GloBE data is maintained in a centralised system (as is common for MNEs using technology platforms for Pillar Two compliance), ensure that the data exports are archived in a format that is admissible in the Indonesian Tax Court. Coordinate with the UPE’s counsel to ensure that privilege is maintained across borders.

Settlement Checklist and Negotiation Levers

Before or during the objection phase, explore settlement. Key negotiation levers include:

• Penalty and interest reduction. Even where the principal tax is upheld, the DGT has discretion to reduce or waive penalties and interest in certain circumstances.
• Instalment payment arrangements. For large assessments, negotiating a payment schedule can reduce the cash-flow impact while the dispute is resolved.
• Partial concessions. Where some elements of the assessment are clearly correct and others are disputed, conceding the undisputed portion and contesting only the disputed items can streamline the process and demonstrate good faith.
• Cross-border coordination. If the group is simultaneously disputing related adjustments in another jurisdiction, a coordinated settlement that resolves both disputes may be achievable through the competent authority process.

Worked Example: IIR Top-Up Calculation and Litigation Timeline

Consider an Indonesian-parented MNE group with a constituent entity in Jurisdiction X. The entity in Jurisdiction X reports GloBE income of USD 20 million and covered taxes of USD 2 million, producing a jurisdictional ETR of 10 per cent, five percentage points below the 15 per cent minimum rate. The top-up tax percentage is 5 per cent, and the top-up tax liability (before SBIE adjustment) is USD 1 million. If the DGT’s assessment fails to apply the SBIE, which might exclude, for example, USD 4 million of payroll and tangible asset costs from the base, the corrected top-up tax base would be USD 16 million, reducing the top-up to USD 800,000.

The difference of USD 200,000 is the amount at stake in the appeal.

Conclusion: Preparing for the Income Inclusion Rule Indonesia Litigation Wave

The implementation of the income inclusion rule Indonesia regime marks a structural shift in how multinational groups manage their Indonesian tax exposure. As the DGT moves from policy adoption to active enforcement, the volume and complexity of IIR assessments will increase. Groups that prepare now, by assembling their evidentiary documentation, engaging local litigation counsel, coordinating with UPE advisers, and building a structured decision framework for when to challenge and when to settle, will be best positioned to manage this new compliance frontier. Those operating in Indonesia alongside broader investment or M&A activity should also consider how Pillar Two obligations interact with the country’s evolving foreign investment framework and M&A regulatory environment.

The Tax Court will inevitably develop a body of precedent on GloBE disputes in the coming years, early, well-prepared litigants will have a disproportionate role in shaping it.

Sources

1. Pajak (Directorate General of Taxes), Indonesia’s Strategic Pivot: Era of the Global Minimum Tax
2. OECD, Pillar Two Model Rules
3. OECD Pillars, Indonesia Issues Regulation PER-6/PJ/2026 on Pillar Two Administrative Requirements
4. EY Indonesia, BEPS Pillar Two Tax Alert
5. PwC Tax Summaries, Indonesia Corporate Tax
6. RSM Global, Implementation of Global Minimum Tax in Indonesia
7. OECD Pillars, Indonesia Publishes Regulation for IIR, UTPR and DMTT
8. MUC Consulting, Indonesia Officially Gains Qualified Status for Global Minimum Tax
9. DDTC, The Tax Disputes and Litigation Review (Indonesia)