Beware of Cross-Border Fiscal Leakage Amid Global Pressures

Jakarta (ANTARA) - The increasingly complex global economic pressures, from worldwide economic slowdowns and geopolitical fragmentation to trade wars that have not fully subsided, have created new dynamics in state revenue management.

For developing countries like Indonesia, these challenges come not only from external factors but also from increasingly sophisticated cross-border tax avoidance practices.

In this regard, a key practice that Indonesia must be wary of is the existence of schemes and loopholes for aggressively minimising tax burdens, thereby eroding the tax base of developing countries, known as base erosion and profit shifting (BEPS), which poses a serious challenge in maintaining fiscal sovereignty.

With a relatively low tax ratio and a large tax gap, every cross-border tax avoidance practice will have a significant impact on the country’s ability to finance development.

The term BEPS was popularised by the Organisation for Economic Co-operation and Development (OECD) in 2012 to describe strategies used by companies to shift profits to jurisdictions with low or no tax rates in order to reduce their global tax obligations. Globally, the OECD estimates that BEPS practices cause a loss of tax revenue amounting to $100–240 billion per year, or about 4–10 per cent of total global tax revenue.

The linkage between BEPS practices and global pressures is currently becoming increasingly relevant and strategic. Amid global economic uncertainty, from growth slowdowns and high global interest rates to escalating geopolitics such as conflicts in the Middle East, multinational companies face immense pressure to maintain profitability. In this situation, efficiency strategies no longer target operations alone but also extend to aggressiveness in cross-border tax planning.

Schemes and Loopholes

Amid increasingly complex global pressures, BEPS practices not only persist but evolve into more adaptive and harder-to-detect forms. Multinational companies exploit combinations of technical schemes and cross-border regulatory loopholes to maintain profitability amid economic slowdowns, energy volatility, and geopolitical uncertainty.

One of the most common schemes is profit shifting through transfer pricing. Companies set transaction prices between group entities to shift profits from high-tax countries to low-tax ones. For example, entities in Indonesia are burdened with high costs for licences, management services, or purchases of goods from affiliates in low-tax jurisdictions, thereby reducing taxable profits domestically.

Additionally, there is the strategic placement of intangible assets. Intangible assets, such as patents, algorithms, and trademarks, are placed in low-tax countries. Entities in market countries like Indonesia then pay substantial royalties, systematically shifting profits abroad.

Another prevalent scheme is thin capitalisation, where companies are financed through excessive debt from foreign affiliates. This allows companies to reduce taxable profits through high interest payments.

No less important, treaty shopping practices also form part of BEPS strategies. Companies exploit networks of tax treaties to obtain lower tax rates by establishing intermediary entities in specific countries with advantageous agreements.