Jurgen Borgt, managing director, and Claudio Fanger, director of client services, Switzerland, outline the new measures and implications for multinationals.
Multinationals with operations in Switzerland may wish to consider their next steps following the country’s decision to adopt the Organisation for Economic Co-operation and Development (OECD) Pillar 2 minimum tax rate of 15%.
On January 1, 2024, the authorities are expected to put in place the new Swiss measures that will apply to multinational companies that have generated combined global annual revenues of EUR750m or more in two of the past four years. This is in line with Pillar 2—otherwise referred to as Global Anti-Base Erosion Model (GloBE) Rules. However, companies conducting activities solely in Switzerland will not be subject to the minimum 15% tax rate.
The implementation of Pillar 2 will be subject to reciprocity. This means the rules will only apply to multinational enterprises or their entities if other countries involved in the company’s structure have also implemented minimum taxation. All companies should liaise with their tax advisers to determine the next steps on a global level. This could prove complicated.
Companies with operations in the Swiss cantons of Zug, Lucerne, Basel Stadt, Geneva, and Vaud will be most affected. Multinational enterprises (MNEs) in these cantons currently enjoy effective tax rates lower than 15%. The Swiss Federal Council states that the cantons affected by the minimum tax rate will receive 75% of tax funds to “safeguard their appeal as a business location.”
How will tax filings change for MNEs in Switzerland under Pillar 2 rules?
Despite the changes, Swiss tax laws and regulations will remain in place. This means that if your company falls under the new minimum tax requirement, you’ll need to prepare two sets of accounts: one under the Swiss Code of Obligations and another based on standards such as International Financial Reporting Standards (IFRS).
Switzerland’s Federal Council aims to align with European Union Pillar 2 tax implementation dates. For example, the introduction of Pillar 2’s Under Taxed Payments Rule (UTPR) in Switzerland will be deferred until January 1, 2025 at the earliest. This is also the case for the European Union at the time of writing.
OECD’s Pillar 2 rules include several measures:
- The Income Inclusion Rule (IIR): This is the primary rule that calls for the minimum tax to be paid by a MNE at the level of the parent entity. At the time of writing, this was set to apply to accounting business years starting on or after January 1, 2024—or more likely December 31, 2023—to align with the EU. We suggest you contact your tax advisers in Switzerland for the latest updates.
- The OECD states that taxpayers in the scope of the IIR can “calculate their effective tax rate for each jurisdiction where they operate, and pay top-up tax for the difference between their effective tax rate per jurisdiction and the 15% minimum rate. Any resulting top-up tax is generally charged in the jurisdiction of the ultimate parent of the MNE.”
- The IIR is generally applied at the ultimate parent entity. The IIR is then applied down the ownership chain. “Rules are also provided to allow the IIR to be applied by a parent entity where there is a significant minority interest, to minimize leakage of low-taxed income,” states the OECD.
- The OECD states that taxpayers in the scope of the IIR can “calculate their effective tax rate for each jurisdiction where they operate, and pay top-up tax for the difference between their effective tax rate per jurisdiction and the 15% minimum rate. Any resulting top-up tax is generally charged in the jurisdiction of the ultimate parent of the MNE.”
- Qualified Domestic Top-up Tax (QDMTT): This is considered Pillar 2’s “backstop rule.” The minimum tax is paid when an entity with low-taxed income is held through a chain of ownership that does not result in the low-taxed income being brought into charge under an IIR. This is where tax matters could become complicated.
- The OECD states: “This rule works by requiring an adjustment that increases the tax at the level of the subsidiary. The adjustment is an amount sufficient to result in the group entities paying their share of the top-up tax remaining after the IIR. The share of the top-up tax is calculated based on a formula, in proportion to the relative share of assets and employees.”
- The OECD states: “This rule works by requiring an adjustment that increases the tax at the level of the subsidiary. The adjustment is an amount sufficient to result in the group entities paying their share of the top-up tax remaining after the IIR. The share of the top-up tax is calculated based on a formula, in proportion to the relative share of assets and employees.”
- Undertaxed Profits Rule (UTPR): This rule gives a country the authority to increase taxes on a business if that business is part of an MNE headquartered in another jurisdiction that pays less than the proposed global minimum tax of 15%.
Next steps for MNEs in Switzerland
Although rates may increase, we’re confident that Switzerland will remain one of the more favorable jurisdictions for MNEs to base their operations given its political stability and highly skilled and educated workforce.
However, the minimum tax initiative will eliminate international tax competition for MNEs in Switzerland. The changes will no doubt mean additional reporting and record-keeping burdens for some multinationals. With this in mind, we recommend that you contact your tax advisers in Switzerland to decide whether changes have to be made. With the EU and UK planning similar rules and implementation dates, time is of the essence to ensure compliance and tax efficiency.
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