As of: 31st of July 2024
Executive Summary
The OECD project on the taxation of the digitalised economy still faces an uncertain future. However, the last technical differences of opinion on Pillar 1 are to be resolved in the near future, after the signing process was postponed several times and should have started at the end of June 2024. Pillar 2 (OECD minimum tax), on the other hand, is already being implemented by most European countries, but still not by major economies such as the USA, China, Brazil or India. The minimum tax is therefore currently more of a European project than a global one. According to rumours, at least China is now considering introducing a domestic supplementary tax. In the USA, Donald Trump’s election could increase resistance to its introduction, which could ultimately spread to other countries. Switzerland must carefully monitor international developments and ensure that a regime with a level playing field is established internationally and that more importance is attached to new instruments to promote the attractiveness of Switzerland as a business location.
Overview
The OECD project on the taxation of the digitalised economy is based on two pillars and aims to improve the acceptance of international corporate taxation. The work is being carried out by the OECD Secretariat. The new tax rules are formally adopted by the “OECD/G20 Inclusive Framework on BEPS” (hereinafter: IF), which comprises more than 140 countries. In October 2021, the IF states adopted the political parameters for the two pillars. Since then, intensive work has been carried out on the technical implementation provisions. For Pillar 1, a multilateral agreement is to be submitted to the states for signature and subsequent ratification in 2024. Pillar 2 will not be implemented by means of a multilateral agreement, but by means of a standardised implementation of the rules developed jointly but adopted individually by the states (common approach).
Pillar 1 (Taxation in the Market States)
The very largest international corporations (a total of around 100 corporations with a turnover of more than EUR 20 billion in sales and a profit margin greater than 10%) will be required to pay a higher proportion of their profits in the countries in which they sell their products. This is provided for in Pillar 1. The focus is on digital corporations in particular, such as Google, Facebook and Apple, which in some cases pay hardly any profit tax in the countries in which they sell their products. However, a large number of traditional industrial companies are also affected, which already pay high taxes in their sales states and have group tax rates of up to 25%.
The final Pillar 1 implementation package, together with a multilateral convention, is to be submitted to the IF member states for approval before the end of 2024. It is not yet known when the signing ceremony will take place. However, for Pillar 1 to be implemented globally, a critical mass of states must ratify the multilateral convention. The decisive factor here will be whether the USA ratifies it. Half of the companies affected by Pillar 1 have their headquarters in the USA, which is why the planned redistribution from the headquarters states to the market states cannot be implemented without US ratification. Ratification requires a two-thirds majority in the US Senate. If Pillar 1 is not implemented, this is likely to boost the UN’s redistribution efforts. Whether the work of the UN will also be broadly supported by the industrialised nations appears uncertain at present, as the latter will have to reckon with a significant reduction in their revenues.
Pillar 2 (OECD Minimum Tax)
Project Pillar 2 requires large companies (with a turnover of at least EUR 750 million) to pay at least 15% tax on their profits in each country in which they operate. The determination of profits is not based on the widely divergent tax regulations of individual countries, but on the International Accounting Standards (e.g., IFRS, US GAAP, etc.) that apply to published consolidated financial statements. The differences in the determination of profits from one country to another are much smaller due to the so-called ‘true and fair view principle.’ In addition, the new international rules (so-called GloBE rules) provide for various corrections, for example, for investments or deferred taxes.
The minimum tax levied in accordance with the international standard for the state’s own territory is referred to as the Qualified Domestic Minimum Top-up Tax (QDMTT or, in Switzerland, the so-called Swiss Supplementary Tax). If a state does not implement the new minimum taxation rules, the state of the parent company (by means of the Income Inclusion Rule IIR) or, subsidiarily, the states of other group companies (by means of the Undertaxed Profits Rule UTPR) should tax the difference between the effective tax rate (e.g. 13%) and the minimum tax rate (15%) reported by the company for a particular state.
If minimum taxation is to be implemented globally, the UTPR must be able to be applied to all states (including the states in which the headquarters are located) without exception. If (i.) all subsidiaries of groups with headquarters in the state in question can be covered by the IIR and (ii.) all group companies of foreign groups can be covered by the UTPR, it is financially disadvantageous for states to refrain from implementing minimum taxation. The only consequence of not implementing minimum taxation would be that the aforementioned tax difference would be collected by another state. If the financial damage is to be minimised, a state must at least introduce a QDMTT. If, on the other hand, the UTPR only applies to a limited extent, states and companies can deliberately restrict the territorial scope of application of minimum taxation. In this way, states that do not implement minimum taxation can improve their attractiveness as a location and companies can reduce their tax burden. At the request of the USA (and many other states such as China, India, etc.), the UTPR currently only applies to a very limited extent.
The Pillar 2 Model Rules were published in December 2021 (see Model Rules). The commentary on the GloBE Model Rules was published in mid-March 2022 (see Commentary GloBE Rules). Since then, there remain numerous application issues, leading to the regular issuance of new detailed technical specifications by the Implementation Framework, such as in the form of Administrative Guidance. However, these detailed specifications also include new amendments to the commentary, some of which even contradict the Model Rules published in December 2021.
Various parts of the Administrative Guidance were published in December 2022, February, July and December 2023, and June 2024. Particularly important were the requirements for the transitional CbCR safe harbor, which should reduce the administrative burden for the companies concerned in the initial years (2024 to 2026). In mid-July 2023, the Implementation Framework published further key details such as the GloBE Information Return (GIR) and various Administrative Guidances, including two new Safe Harbors (QDMTT Safe Harbor, Transitional UTPR Safe Harbor). The Transitional UTPR Safe Harbor is particularly important. This Safe Harbor, which was adopted under pressure from the USA in particular, contains a temporary exemption from the scope of application of the UTPR.
Various requirements necessary for correct implementation are still outstanding. As there are still differences of opinion between the various countries on politically sensitive issues, further delays must be expected.
Stance
The G20-initiated project to tax the digitalised economy continues to face an uncertain future. Even among the G20 member states, the initial euphoria has evaporated. The aim is to finally resolve the last technical differences of opinion on Pillar 1 so that the multilateral convention can be signed and later ratified by the states. After several postponements, the signing process was supposed to start at the end of June 2024. As of mid-July, there is still no date for the start of the signing process. The doubts as to whether the new rules will ever come into force are far more serious, as the USA will sign the necessary multilateral agreement but is unlikely to ratify it. Without the USA, the desired redistribution of tax base from domiciliary states such as Switzerland to market states such as China or India cannot even be started.
The situation is somewhat better with the second pillar of the project, the so-called OECD minimum taxation. By the beginning of 2024, almost all European countries will have started implementing the minimum taxation (2024: introduction of the national supplementary tax QDMTT and the international supplementary tax IIR; 2025: introduction of UTPR). Many economically important countries such as the USA, China, Brazil and India are still not showing any signs of introducing minimum taxation. The minimum tax is therefore currently more of a European than a global project. According to rumours, China is now at least considering introducing the domestic supplementary tax (QDMTT). If Donald Trump is elected president in the US elections, the resistance of the US and other countries to minimum taxation could increase. In particular, the US could use retaliatory measures to defend itself against the additional taxation of US tax bases and the tax bases of US companies abroad, and demand that important minimum taxation rules be adapted in its favour. Switzerland and its companies should therefore prepare themselves for a highly fragmented and uncertain international tax landscape in the coming years.
Not only project pillar 1, but also project pillar 2 is meeting with strong resistance in the USA and is unlikely to be implemented in the USA in the foreseeable future. While the Biden administration continues to help shape the rules, the US Congress is vehemently opposed to the introduction of OECD minimum taxation. If Donald Trump wins the presidential elections, the US could implement a confrontational policy towards foreign countries that want to access the US tax base or hinder US companies in terms of taxation. So far, the IF has given in to corresponding pressure from the US, as the adjustments to the UTPR in mid-July 2023 show. In the future, too, adjustments to important rules are likely to be made under pressure from the US.
In December 2022, the EU adopted the directive on the implementation of the OECD minimum taxation. This means that the larger EU member states have committed to implementing the OECD minimum taxation at the beginning of 2024. At the moment, it looks like the vast majority of larger EU member states will fulfil their obligations. Some countries will introduce the rules retroactively in the course of 2024 (e.g. Spain).
Outside Europe, enthusiasm for the introduction of minimum taxation seems to have largely evaporated. With the exception of Canada, Japan, Korea and Australia, many countries are holding back on announcements or consultation procedures. In any case, around three-quarters of the members of the Inclusive Framework have not implemented minimum taxation by the beginning of 2024. These include economic heavyweights such as China, India and Brazil.
At the end of 2023, the Federal Council decided to introduce the Swiss Supplementary Tax at the beginning of 2024. At the same time, the Federal Council published the definitive ordinance. The decision on the introduction of the foreign supplementary taxes IIR and UTPR is to be taken at a later date. This is expected to take place in the second half of 2024.
According to the transitional provisions, 25 per cent of the revenue from the Swiss supplementary tax will go to the federal government. The cantons will decide at a later date how any additional revenue from the supplementary tax will be used, depending on the amount of revenue expected and the cantonal objectives. It is unlikely that there will be any clarity about the actual revenue until one or two years after the introduction (i.e. in 2026).
Update 4 September 2024: The Federal Council has decided that the IIR will be implemented in Switzerland as of the beginning of 2025 and that the introduction of a UTPR will be postponed until further notice.
Outlook
It is currently impossible to predict future developments at the international level with regard to the OECD Minimum Tax. It seems highly uncertain whether the tax will become established globally and be implemented by most major economic powers (USA, China, India, EU, Brazil, etc.). Many countries are currently endeavoring to promote industrial companies, attract additional investment and jobs, and thus generate higher tax revenues. These countries do not want to create additional tax obstacles that could discourage companies from investing. Consequently, the earlier euphoria surrounding the OECD Minimum Tax has largely evaporated.
The outcome of the US presidential and congressional elections, for example, is crucial for the international spread of the Minimum Tax. While the Democrats are advocating for general tax increases (including tax deductions for research, development, and production relocations to the USA), the Republicans reject such increases and could implement countermeasures against foreign countries accessing US tax bases via the UTPR. Depending on the election results, significant adjustments to the Minimum Tax rules are also to be expected.
As a small state, Switzerland will not be able to significantly influence the Minimum Tax rules. Switzerland’s goal must be to prevent objectively unjustifiable disadvantages for itself or protectionist advantages for other countries to ensure a level playing field as much as possible. Should other countries wish to provide tax deductions for research, development, CO2 reductions, and other activities, Switzerland should support such efforts.
The Federal Council’s decision to introduce the Swiss Supplementary Tax raises several application issues for Swiss companies, as well as important questions regarding Switzerland’s attractiveness as a business location. The implementation of the OECD Minimum Tax is demanding in terms of legislation and administration. For many companies, however, locational disadvantages compared to competitor locations are more critical than the complexities of application
Position
SwissHoldings has taken note of the Federal Council’s decision of December 2023 to introduce the Swiss supplementary tax at the beginning of 2024. While the business community supports the introduction of the IIR at the beginning of 2025, SwissHoldings is firmly opposed to the introduction of the UTPR. We consider the introduction of such a tax at the beginning of 2025 to be a no-go, especially since we fear that numerous foreign countries such as the USA, China and many more will regard the taxation of their tax base by wealthy Switzerland as unacceptable and could take countermeasures.
Before it is introduced, the international acceptance of this instrument should be monitored for a few years. The UTPR is associated with considerable reputational and locational risks. In particular, the risk of trade wars with non-implementing but significant trading partners such as the USA or China must be taken into account when making decisions. The past has shown that Switzerland cannot win tax disputes with major powers such as the USA. While the IIR is similar to the US GILTI and therefore enjoys greater acceptance in the USA, the UTPR is a completely different system that is controversial in politics and academia (e.g. violation of DTT provisions). The profits of business units that are not tax-resident in their own country and, unlike the IIR, do not have a parent company that is tax-resident in their own country, are taxed. The US has already threatened to impose sanctions on UTPR states. Political measures such as the suspension of DTA negotiations or the ratification of the DTA revision protocol also appear possible.
In addition to wealthy industrialised nations such as the USA, the UTPR is also likely to have an economic and financial impact on developing countries. It should also be noted that for a small market state such as Switzerland, the UTPR calculation will only lead to minimal financial advantages in relation to other UTPR states with large markets (EU, UK, etc.). Furthermore, the introduction of the UTPR would mean that the investment and collection costs, particularly for the cantons, would be in a barely justifiable proportion to the returns. It could also lead to international double taxation and thus to disputes between the UTPR states and the company concerned. The federal government and the cantons would also have to become involved in such proceedings in order to eliminate double taxation.
In view of this, the Federal Council should examine the next steps in the implementation of minimum taxation less in terms of potential additional revenue and more in terms of the risk of retaliatory measures, e.g. by the USA, which could cause collateral damage. The Federal Council should also take the liberty of revisiting decisions taken at a later date in order to protect the Swiss economy. In view of the great uncertainty as to how minimum taxation will develop, flexibility is crucial.
Furthermore, the federal government and the cantons should ensure that locational disadvantages resulting from higher tax burdens on Swiss companies are compensated for in other ways. The following factors should be taken into account:
- International requirements such as the EU Foreign Subsidy Regulation and the implementation of the OECD minimum taxation
- Impact on the locational attractiveness of various sectors
- Financial and economic consequences (short, medium and long term) without countermeasures
- the possibility of creating internationally accepted and targeted location measures
- transfer pricing implications
- domestic policy aspects
Weiterführende Dokumente
3. February 2023
Joint consultation response on compliance and tax certainty aspects of global minimum tax
25. January 2023
SwissHoldings comments on OECD public consultation document: Pillar One – Amount B
16. December 2022
OECD tax millions to stay in Switzerland
14. November 2022
Statement on the Ordinance of the Federal Council on the Minimum Taxation of Large Groups of Companies
26. October 2022
EATC wants 50/50 distribution of the gross profit from the supplementary tax
28. September 2022
Council of States approves OECD minimum taxation bill
26. August 2022
OECD digital taxation project: WAK-S largely follows Federal Council proposal
23. June 2022
OECD Digital Taxation Project: Message published
11. April 2022
SwissHoldings comments on the federal decree on the implementation of the OECD/G20 project on the taxation of the digital economy
11. April 2022
Vernehmlassungsantwort zur Umsetzung des OECD/G20-Projekts zur Besteuerung der digitalen Wirtschaft
4. March 2022
SwissHoldings comments on public consultation document: Pillar One – Amount A: Draft Model Rules for Tax Base Determinations
25. January 2022
2022: Steuerpolitische Weichen richtig stellen
13. January 2022
SwissHoldings begrüsst Umsetzungsplan zum OECD-Digitalbesteuerungsprojekt
6. September 2021
OECD-Digitalbesteuerung – Unternehmen diskutieren mit Verwaltung
16. February 2021
Das OECD-Digitalbesteuerungsprojekt könnte scheitern – mit potentiell negativen Folgen für die Schweiz
16. February 2021
Das OECD-Digitalbesteuerungsprojekt könnte scheitern – mit potentiell negativen Folgen für die Schweiz
2. February 2021
Steuerpolitische Prioritäten nach Corona – Fokus auf Wirtschaftswachstum, Wettbewerbsfähigkeit und Steuereinnahmen
14. December 2020
Public Consultation on Reports on the Pillar One and Pillar Two Blueprints – Joint comments by economiesuisse and SwissHoldings
10. December 2019
OECD/G20-Projekt zur «Besteuerung der digitalisierten Wirtschaft» – neuste Entwicklungen und Anliegen von SwissHoldings
10. December 2019
OECD/G20-Projekt zur «Besteuerung der digitalisierten Wirtschaft» – neuste Entwicklungen und Anliegen von SwissHoldings
2. December 2019
Public Consultation on the Global Anti-Base Erosion Proposal (“GloBE”) under Pillar Two Joint comments by economiesuisse and SwissHoldings
12. November 2019
Public Consultation on the Secretariat Proposal for a „Unified Approach“ under Pillar One – Joint comments by economiesuisse and SwissHoldings
7. November 2019
Globale Umverteilung der Unternehmensgewinne gefährdet Schweizer Erfolgsfaktoren
