Updates

The OECD/G20 project on taxation of the digitalized economy includes profit redistribution (Pillar 1) and the introduction of a global minimum tax of 15% for large corporations (Pillar 2). While Pillar 1 is blocked, Pillar 2 has already been implemented by various states. The USA under President Trump is now likely to succeed in enforcing a special solution with the Side-by-Side System. The Side-by-Side System is to be adopted by the end of 2025, which will give the USA a clear competitive advantage. For Switzerland, this means it must secure its attractiveness for international companies through efficiency, digitalization, international networking, and targeted incentives.

Contents

The OECD project on taxation of the digitalized economy is intended to improve acceptance of international corporate taxation. The project is being advanced within the framework of the “OECD/G20 Inclusive Framework on BEPS” (hereinafter: IF), which comprises more than 140 states. It consists of two pillars. The content of Pillar 1 is a stronger redistribution of profits of the world’s approximately 200 most successful corporations from residence to market states. The content of Pillar 2 is the introduction of a minimum profit tax of 15 percent for all corporations with revenue of at least 750 million euros.

State

The implementation of Pillar 1 has so far not progressed beyond work at the OECD level. Pillar 2 is well advanced, with EU states and Switzerland, among others, having implemented the global minimum tax in whole or in part. However, the project initiated by the G20 has long struggled with major problems. Most IF states have not implemented the minimum tax.

On January 20, 2025, US President Trump also announced that the USA is withdrawing from the OECD digital taxation project. The USA also wants to take countermeasures such as new withholding taxes against states that impose discriminatory and extraterritorial taxes against the USA (Link to the decree and Link to America First Trade Policy). Specifically, the US administration demanded from the rest of the world that US tax law be regarded as equivalent to OECD minimum taxation and therefore US tax law should coexist with it (now referred to as the so-called Side-by-Side System). To ensure that minimum tax states accept the US demand, the US Congress developed a provision (IRC Section 899) with extremely painful sanctions measures as part of the so-called One Big Beautiful Bill (BB-Bill). At the end of June, the G7 states agreed in a joint declaration (Link G7-Statement) on the implementation of the Side-by-Side System (SbS-System). In return, the USA declared it would remove Section 899 from the BB-Bill. The G7 declaration states that:

• US parent corporations should be completely exempted from UTPR and IIR (but not foreign QDMTTs) with regard to both their domestic and foreign profits.
• Work on the SbS-System should be carried out parallel to substantial administrative simplifications of OECD minimum taxation.
• Changes in the treatment of substance-based, non-refundable tax deductions in OECD minimum taxation should be examined.

It is now known that the work on implementing the SbS-System through the issuance of new Administrative Guidances should be completed by the end of 2025. Currently, a Guidance on the SbS-System (Coordinating Safe Harbor), a Guidance with simplifications (Simplified ETR Safe Harbor), and a document on the treatment of substance-based tax deductions are reportedly being developed. Whether the ambitious timeline with all the promised Guidances will actually be met cannot currently be assessed. There are also substantive doubts. The Simplified ETR Safe Harbor is supposed to enable companies to easily show in many states that they do not have to pay minimum tax. Since the minimum tax rules are extremely difficult to apply both for the affected companies and for the controlling tax administrations, this Safe Harbor is of great importance for business and administrations. It is currently unclear whether this Safe Harbor will actually be easy for companies to apply.

Outlook

The year 2025 continues to bring significant changes to OECD minimum taxation. By the end of the year, the more than 140 IF member states should unanimously adopt the SbS-System and thus internationally approve the exemption for the USA from OECD minimum taxation. Since the USA under President Trump has impressively shown that it is prepared for harsh sanctions against other states, it is not expected that individual IF member states will prevent the minimum tax exemption for the USA. The consequence of the exemption is that the USA will improve its competitiveness against OECD minimum tax states according to the assessment of many European corporate representatives. Whether the IF will succeed in eliminating the US competitive advantage with an effective new substance tax deduction and an easily applicable Simplified ETR Safe Harbor cannot be predicted. Perhaps that is not even the goal of important OECD minimum tax states. In any case, Switzerland and other economically successful smaller states must expect to have shorter weapons in international tax competition against the USA in the future.

Should the US competitive advantage not be compensated by the IF, it will be difficult to convince states like China, India and many more to introduce minimum taxation. Thus, OECD minimum taxation could become even more of a primarily European project than before. That European states abandon OECD minimum taxation appears unrealistic, particularly for political reasons. This would require, for example, a unanimous decision to repeal the corresponding EU minimum tax directive. European states will also not allow states like Switzerland to abandon the financially and economically harmful minimum tax without substantial disadvantages.

Position

OECD minimum taxation is a project by economically significant high-tax states, which is directed against successful smaller states with low profit taxes. The latter should lose tax attractiveness and be economically tied back. Switzerland, alongside Singapore and Ireland, is particularly in the crosshairs. International companies should make a larger portion of their tax payments in states with higher taxes. That OECD minimum taxation fails due to the USA’s departure appears unlikely. Both the USA, which continues to actively participate in designing the minimum tax, as well as most European states have a great interest in its continued existence for competitiveness aspects.

For Switzerland, OECD minimum taxation is a location disadvantage. Nevertheless, it is not purposeful to exit under the current circumstances. If Switzerland wants to preserve its economic success and the lucrative tax revenues from international companies, it must pursue new paths to convince them to exercise relevant functions in Switzerland. Efficiency, digitalization, international networking, a service-oriented and customer-focused administration are important subject areas. Financial incentives for tax-lucrative decision functions or for R&D&I activities should also be promoted. The goal must be to continue being an attractive location for decision functions during regular reviews and to avoid function relocation to lower-wage foreign countries.