On Sunday, 18 June 2023, the Swiss public voted to pass new legislation in order to adopt the OECD/G20 minimum taxation rules for multinational enterprises (MNEs). The new rules will be implemented in Switzerland by means of a constitutional amendment which provides the Federal Council the authority to enact the rules temporarily on the basis of an ordinance. This temporary ordinance shall apply until it is replaced by a permanent federal law, which needs to be presented by the Federal Council to the Swiss Parliament within six years.
Background
After years of negotiations, 136 member jurisdictions of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting reached a historic agreement on 8 October 2021 on a two-pillar solution to fundamentally reform the international tax framework. Pillar Two of this solution aims to reduce corporate income tax competition among countries by introducing a global minimum corporate income tax rate of 15% to MNEs with a consolidated revenue of at least EUR 750 million per year. Swiss based entities that belong to such an MNE group will remain subject to ordinary corporate income tax law, same as the other approximately 99% entities located in Switzerland that are not affected by the new minimum taxation rules. However, affected entities will have to adhere to additional tax rules according to which new compliance burdens will need to be considered and, if the corporate income tax burden of such entities is below 15%, a supplementary tax (Top-up tax) will be levied in the amount of the shortfall.
Temporary ordinance regarding minimum taxation of MNEs
On 17 August 2022 the Federal Council opened the first public consultation on the draft ordinance regarding minimum taxation of MNEs which lasted until 17 November 2022. The main aspect of this first draft ordinance relates to technical issues. The draft ordinance for example makes a link to the OECD Model Rules and its Commentary as well as the Implementation Framework and declares these guidelines directly applicable in Switzerland. This is necessary in order to ensure that the Swiss rules are implemented in compliance with the OECD guidelines and that they are accepted internationally. The first draft ordinance further contains rules on how to allocate the Top-up tax between all Swiss entities of an MNE group.
The Federal Council opened a second public consultation on 24 May 2023 on an extended version of the draft ordinance and at the same time published its comments received to the draft ordinance during the first public consultation. The final ordinance is expected to be published later this year. The extended version of the draft ordinance which now is subject to the second public consultation until 14 September 2023 contains further rules, in particular with regard to procedural aspects. The extended draft ordinance for example proposes a concept according to which only one Swiss entity of an MNE group shall be subject to the Top-up tax (however, all Swiss entities belonging to that MNE group shall be jointly liable for the Top-up tax) and that only one canton is in charge for the assessment and collection of the Top-up tax. This canton is referred to as the so called “One-Stop-Shop”. The aim of this concept is to simplify the compliance burden of MNEs in scope of the new rules. Further, the extended ordinance also contains rules concerning appeal and criminal proceedings.
When will the new rules enter into force in Switzerland?
The final version of the ordinance is expected to enter into force in Switzerland on 1 January 2024. The Undertaxed Profits Rule (UTPR) is expected to apply as per 1 January 2025. This date corresponds to the intended enactment date of other jurisdictions, in particular the European Union. However, the Federal Council will reconsider the enactment date should the implementation in other jurisdictions be delayed. Therefore, the date of entry into force is left open in the draft ordinance. A political balancing of interests could result in introducing the qualified domestic minimum Top-up tax also as per 1 January 2025, same as the UTPR and like Singapore, who as announced implementation in 2025 for location policy reasons. It is rather unlikely though that the implementation of the Income Inclusion Rule will also be postponed by one year. Particularly worth mentioning is that the ordinance will be applicable to concerned Swiss entities for business years starting on or after the enactment date. Thus, for entities with a business year from April to March, the first business year in scope of the new rules, in particular the Income Inclusion Rule, will be the business year April 2024 to March 2025, provided the ordinance will enter into force on 1 January 2024.
Allocation of revenues from the Top-up tax
Due to the higher tax burden caused by the minimum tax, the Top-up tax is triggered in those cantons in which MNEs are located that are taxed below 15%. Therefore, these cantons will receive 75% of the revenues from the Top-up tax so that they can use these funds to invest in their locational attractiveness, keeping in mind that a portion of the so received Top-up tax will be distributed to other cantons as part of the national fiscal equalization system. The federal government will receive the remaining 25%. This 75%/25% distribution ratio was criticized by the opponents of the minimum tax bill. They demanded a higher share than 25% for the federal government as well as a more even allocation among the cantons.
Recent OECD developments
On 20 December 2022, the OECD published three guidelines which form part of the Implementation Framework (1. Guidance on Safe Harbours and Penalty Relief, 2. public consultation document on the GloBE Information Return and 3. public consultation document on Tax Certainty for the GloBE Rules). The guidance on Safe Harbours have been eagerly awaited by concerned MNEs and contain temporary safe harbour rules as well as a framework for the development of permanent safe harbours. The aim of the transitional safe harbours is to release MNEs from the compliance obligation of preparing a fully-fledged Pillar Two calculation based on the GloBE Model Rules. Instead, the temporary safe harbours enable MNEs to base their calculations on information contained in the Country-by-Country Reporting (“CbCR”) and financial statements. The transitional safe harbour rules use revenue and profit/(loss) before income tax from an MNE’s CbCR as well as income tax expense from an MNE’s financial accounts to determine whether the MNE’s operations in a jurisdiction meets one of the three safe harbour tests. If one of the three tests is fulfilled, the Top-up tax of a jurisdiction shall be deemed to be zero.
On 2 February 2023, the OECD published the Administrative Guidance on GloBE Rules. The aim of the Administrative Guidance is to ensure that implementing jurisdictions apply the GloBE Rules consistently. As the Administrative Guidance reflects the Inclusive Framework’s agreed understanding on how the GloBE Rules should be interpreted and applied, they expect to play an important role in ensuring coordinated outcomes of the GloBE rules and to provide a level playing field for MNEs. Further administrative guidance will be needed on an ongoing basis after the GloBE Rules have been implemented. The Administrative Guidance will be incorporated into a revised version of the GloBE Commentary to the GloBE Model Rules that is expected to be released later this year and will replace the initial version of the GloBE Commentary issued in March 2022.
Going forward
Entities affected by the minimum taxation rules should continue analyzing the new rules and preparing their systems in order to enable correct and efficient data processing as well as data reporting once the new rules have entered into force.
Tax Partner will continue monitoring and informing you on further developments in Switzerland.