Switzerland on track to implement the Pillar 2 international tax reform by 2024
In October 2021, the OECD/G20 Inclusive Framework (hereinafter “IF”) involving over 130 countries agreed on a two-pillars approach to resolve the international tax challenges arising from the digitalization of the global economy (referred as BEPS 2.0). The publication of the model rules for Pillar 2 followed in December 2021. The aim is to avoid a proliferation of national unilateral measures, thus ensuring legal certainty. One year later, on 20th December 2022, the OECD released additional documents including an implementation package of Pillar 2.
The main proposal is the introduction of a global minimum tax rate of 15% for large multinational entities (MNEs), which marks a historical milestone. The agreement also provides details on several key parameters relevant to the application of Pillars 1 & 2.
Given its complexity, Pillar 1 is not yet very advanced compared to Pillar 2, and the detailed rules are still being agreed upon. A signing ceremony of a Multilateral Convention could be expected in the first half of 2023, with the objective of an entry into force in 2024. Pillar 2, which will be implemented through domestic legislation, will most likely be introduced first. An initial application of the Pillar 2’s rules in 2023 seems highly unlikely; it is thus expected as of 2024. However, further developments on implementation are expected in the coming months.
For these reasons, this article focuses on the implementation of Pillar 2 in Switzerland.
Pillars 1 & 2 at a glance
The key components of the two pillars can be summarized as follows:
Pillar 1 deals with the reallocation of taxing rights over certain profits generated by MNEs to jurisdictions where customers rather than the businesses, are located (“market states”).
The approach is based on a non-physical presence nexus rule with the aim to establish a taxable presence in the digitalized economy, regardless of the MNEs’ physical presence. Pillar 1 is about where large global businesses are required to pay taxes.
The rule will apply to MNEs, with global revenue exceeding EUR 20 billion and profit margin above 10%. Jurisdictions in which the MNE derives at least €1m in revenue will benefit from the new taxing right. To ensure that smaller countries will benefit as well from the new rules, a lower nexus threshold of EUR 250 000 applies where a country’s GDP is lower than EUR 40 billion.
Pillar 2 is designed to ensure, through a set of global anti-base erosion (GloBE) rules, that large companies operating internationally pay an effective tax rate of at least 15% in every jurisdiction they operate in. Pillar 2 is about how much tax large global businesses are required to pay.
Entities in scope are MNEs with a global turnover greater than EUR750 million according to their consolidated financial statements, in line with the already existing Country-by-country reporting (CBCR) threshold.
GloBE rules introduce an additional tax on the difference between the local effective rate and the minimum rate of 15%. The main components of the GloBE rules may be summarized as follows :
- 2 interlocking domestic rules: Income inclusion rule (IIR) as a primary rule to impose a top-up tax on a parent entity and Undertaxed payments rule (UTPR) as a secondary rule to ensure low-tax income of MNE group members is taxed at minimum effective tax rate of 15%.
- Treaty rules: Subject to tax rule (STTR), which allows source taxation on related party payments taxed in the recipient country at below minimum rate, and a switch-over rule (SOR).
The #OECD rules on minimum #taxation are based on a common approach, meaning that jurisdictions are not required to adopt these rules. However, if they decide to implement them into their national law, they should follow the OECD model rules. In addition, they must accept the application of these rules by the other jurisdictions.
Thus, if Switzerland doesn’t act, the large groups operating on its territory may be taxed abroad. The confederation has every interest in adapting its tax system in order to preserve its economic and fiscal interests. Switzerland is therefore very active in the implementation of Pillar 2.
On 13th January 2022, the Swiss Federal Council outlined a step-by-step plan, driven by three main guidelines: ensuring minimum taxation, implementing in a targeted manner, and preserving federalism.
The Swiss Federal Council plan, a pragmatic step-by-step approach to meet the time pressure
To ensure that the project comes into force by January 2024, the #Swiss Federal Council proposed an amendment to the Constitution. The purpose is to create a transitional constitutional provision authorizing the Federal Council to temporarily regulate the minimum taxation by means of a temporary implementing Federal ordinance.
This process allows the necessary legal basis (federal law) to be elaborated without the time constraints of an ordinary legislative procedure, which can be very long in Switzerland.
On 16 December 2022, the Swiss Parliament approved the proposal of the Federal Council on the constitutional provision and the temporary ordinance. As a next step, the Swiss citizens will have to decide about the proposal on 18 June 2023 (public referendum). If the amendment is approved, the Federal Council will implement the rules through the temporary ordinance.
At a later stage, within six years after the introduction of the Pillar Two rules and once the application of the international rules will be sufficiently clear, the Swiss Parliament will pass a federal law replacing the Ordinance.
The ordinance guidelines: implementing minimum taxation for MNEs while preserving Switzerland’s competitiveness and federalism
The minimum taxation will be ensured by a supplementary tax levied on companies for which the scope of Pillar 2 is met. Such supplementary tax will be determined on the basis of a standardized calculation basis, different from the rules normally applicable in Swiss income tax law.
Two types of #corporate groups active in Switzerland are affected: those that do not reach the minimum taxation in Switzerland and those that do not reach the minimum taxation abroad.
The minimum taxation should be implemented in 4 steps :
(i) determine the tax burden by canton,
(ii) calculate the minimum tax according to the OECD 15%,
(iii) calculate the Swiss supplementary tax (15% – aggregate Swiss tax rate),
(iv) allocate the Swiss top-tax proportionally to the group entities that contributed to the under-taxation.
The aim is to implement the minimum taxation in a targeted manner, which means that only companies that meet the scope of the application are affected. The federal and cantonal income tax remains unchanged.
In order to preserve the cantonal sovereignty, the taxation and collection of the supplementary tax will be carried out by the cantons. 75% of the revenues from the supplementary tax will also be allocated to the cantons. The other 25% will be allocated to the Confederation.
Financial consequences are uncertain. In the short term, additional tax revenues from the supplementary tax are estimated at 1-2.5 billion CHF.
Such an increase in tax revenue gives Switzerland the leeway to strengthen its attractiveness to corporate groups. Cantons are indeed encouraged to implement tax incentives and measures to promote their economic position. In that respect, in a new report on Pillar, OECD provides guidelines on how tax incentives should be used under the global minimum corporate tax framework. It precises that tax incentives should focus on expenditure rather than income.
Known for its punctuality, Switzerland is in line with OECD’s tight timeline. Everything seems under control for an introduction of Pillar 2 by 1st January 2024, as planned.
Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two)
Latest news & publications
Réforme fiscale à Genève – vers une imposition plus équitable pour les entrepreneurs ?
Rétrospective fiscale pour l’année 2023
2023 Year-end Swiss Tax Update