The Swiss people say yes to the OECD's proposal for minimum taxation of multinationals

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OECD minimum taxation: The Swiss people say yes

The Swiss people have just approved the introduction of a constitutional basis authorising a minimum tax rate of 15% for international active groups. A supplementary tax will be introduced by a temporary ordinance, essentially based on the GloBE rules (Global Anti-Base Erosion Model Rules - Pillar II "Pillar 2") approved jointly by the OECD and the G20 on 14 December 2021. Within a six-year period, the Federal Council will have to submit a law repealing this ordinance.

Reminder of "Pillar II" issues

The GloBE rules apply to multinational groups whose consolidated revenues exceed the threshold of €750 million. This threshold is identical to the one that triggers the obligation for multinationals to file a country-by-country report (CbCR).

It should be remembered that this new tax regulation does not apply to Swiss SMEs and groups of companies with consolidated revenues below this threshold, nor to Swiss SMEs and groups of companies operating solely on Swiss territory.

However, once the consolidated turnover threshold is reached, Swiss companies owned by a foreign group, Swiss companies with at least one foreign subsidiary and Swiss companies operating through a foreign branch will all be subject to a minimum taxation of 15%, even if their effective tax rate is currently below 15%. In Switzerland, some 200 companies and a significant number of Swiss subsidiaries of foreign groups exceeding this turnover limit will therefore be affected.

Minimum taxation will soon come into force internationally. If Switzerland had chosen not to implement the GloBE rules into its own legislation, other countries that have adopted them would have been entitled to levy the tax differential between the 15% minimum tax rate and the effective tax rate of the Swiss entity concerned, at the expense of Switzerland.

The Swiss people clearly understood what was at stake in the vote by allowing the tax authorities to levy a supplementary tax not only on Swiss companies subject to Pillar II (Swiss supplementary tax), but also on foreign companies with no tax link to Switzerland. For the latter, the GloBE rules allow Switzerland to levy a supplementary tax equal to the difference between the 15% rate and the effective tax rate of the foreign constituent entity of the group (international supplementary tax).  

By proposing the adoption of a federal decree in December 2022, Parliament has clearly anticipated the tax and financial challenges of Pillar II for our country, while at the same time seeking to protect Swiss companies from additional tax procedures abroad. A new version of the draft ordinance was published on 24 May 2023 and submitted for consultation. Pillar II is scheduled to come into force on 1er January 2024, provided that this date is also adopted by the other countries. The first GloBE "information return" should be filed on 30 June 2026 at the earliest.

The new Pillar II regulations

The implementation of Pillar II is complex. Multinational groups need to understand the GloBE rules as quickly as possible, anticipate the tax impacts, adjust the notes to the group's consolidated financial statements and comply as closely as possible with the reporting and taxation procedures set out in the new international tax regulations. Monitoring developments in Swiss tax legislation and that of the countries in which the Group operates will also be an important challenge, with the aim of anticipating changes and adapting the Group's action plans. Pillar II thus adds a new dimension to the tax governance of major international groups, which have to anticipate growing tax risks and controversies. 

If we were to summarise the main stages in the implementation of Pillar II by the groups concerned, we would highlight the following actions:

Actions

Comments

Check whether the group falls within the scope of Pillar II

  • Review of CbCR
  • Verification of the threshold of €750 million in consolidated annual turnover for two of the previous four financial years

Identify the group's constituent entities in each country

  • Review of the Group organisation chart
  • Identification of entities excluded from Pillar II

Identify the possibility to qualify for transitional and permanent GloBE safe harbours under Pillar II 

  • For example, identification, on the basis of the CbCR, of situations where the substance deduction could turn out to be higher than the GloBE profit.

Check whether the Group prepares its consolidated financial statements in accordance with an internationally recognised accounting standard (e.g. IFRS)

  • The minimum tax rate is not calculated on the profit shown in the statutory accounts drawn up in accordance with the Code of Obligations, but on the IFRS profit, adjusted for the GloBE rules, of each entity making up the group.
  • GloBE adjustments can lead to significant differences between GloBE profit and taxable profit under Swiss tax law.

Apply the adjustments provided by GloBE to calculate the GloBE income

Review of the IFRS consolidated annual result and identification in particular of :

  • transactions internal to the Group, which are treated in the same way as external transactions,
  • income from qualifying shareholdings that is excluded from determining profit,
  • gains and losses relating to the Group's restructuring operations, which are not taken into account,
  • certain foreign currency gains or losses that are restated
  • international shipping income of constituent entities that is excluded from minimum taxation.  

Identify covered taxes according to GloBE rules 

  • In Switzerland, this includes income tax, capital tax and, in part, withholding tax. Deferred tax assets and liabilities reported in the consolidated financial statements should also be taken into account.

Determine the effective tax rate of the group's constituent entities by country 

  • Comparison of the sum of covered taxes in a country with the sum of decisive profits in the same country.  

Calculate the percentage of additional tax (Top-up Tax)

  • The additional tax is equal to the difference between the minimum tax rate of 15% and the effective tax rate of the entity concerned.

Calculate the amount of additional tax on the basis of the excess profit 

  • The excess profit corresponds to the GloBE profit reduced according to the substance criteria.
  • The reduction is calculated by applying a percentage defined by GloBE regulations to payroll costs and tangible assets.

The complexity of the Swiss tax system when it comes to implementing the GloBE rules

Under the GloBE rules, the effective tax rate for each jurisdiction is calculated by aggregating the income and tax of all group entities within that jurisdiction.  

The Swiss tax system adds a further level of complexity to the implementation of the GloBE rules. Firstly, each canton is the taxing authority for levying cantonal and federal tax on companies domiciled in the canton. As the cantons are also the taxing authorities for the new supplementary tax, the draft ordinance sets out the rules for identifying the “leader” canton that carries out taxation for the entire group of companies domiciled in Switzerland.   

In addition, the effective tax rate of a company operating in several cantons is influenced by the inter-cantonal apportionment rules used to allocate its profits and capital between the cantons, as some cantons have effective tax rates below the 15% threshold, while others have effective tax rates above 15%.

Finally, the minimum tax rate of 15% may not be reached even in cantons where tax rates exceed 15%. Such a situation could arise, for example, when a company benefits from the Patent Box regime, which provides for preferential taxation of patent income.

Notes to the consolidated financial statements

On 23 May 2023, the IASB published an amendment to IAS 12, which provides for the recognition of the tax impacts associated with the implementation of Pillar II.

On this basis, international groups will have to take account of the impact of the new international tax regulations when drafting the notes to the financial statements for the year ending 31 December 2023.  

Other aspects relating to deferred tax should be the subject of a specific analysis before the next closing of accounts.

To conclude

Pillar II is reshaping the international tax landscape. The new tax regulations are forcing tax authorities, taxpayers and tax advisers to change the way they approach the tax implications, particularly for international groups. It is important to prepare now for the implementation of these new rules both in Switzerland and internationally. Mazars is delighted to assist you!

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