Implementation news
During its meeting on 22.12.2023, the Federal Council decided to begin levying the supplementary tax in Switzerland from 01.01.2024. The Federal Council has decided to initially refrain from applying the international supplementary tax rules IIR and UTPR. In this regard, it will continue to monitor international developments and decide about implementation at a later date, should this prove necessary in order to preserve Swiss interests. The Ordinance on the Minimum Taxation of Large Corporate Groups (Minimum Taxation Ordinance, MTO) will therefore enter into force on 01.01.2024. It applies to tax years beginning on or after the date of its entry into force.
Thus, it provides a much welcome simplification for businesses impacted by the minimum taxation of 15%. The new role of CbCR shifts from being a high-level transfer pricing risk assessment tool for tax authorities globally to being a compliance simplification tool under Pillar 2.
⏱ 18 minAs Switzerland in its popular vote (78,45% Yes; 21,55% No) on 18 June 2023 has approved the implementation of the GloBE Rules under Pillar 2 in its domestic legislation with effect as of 1 January 2024, the CbCR represents a compliance relief tool for many Swiss Multinational (MNE) groups in scope of the Pillar 2 (companies with a consolidated annual turnover of EUR 750 million). We summarize the key considerations in the below.
What is CbC Reporting and what was its initial role?
The CbCR was introduced by the OECD’s Action 13 to strengthen the international tax transparency in its efforts against base erosion and profit shifting (BEPS). Originally, the CbCR has been meant to be a high-level risk assessment tool for the tax authorities to identify potential BEPS related risks within a MNE group. As part of the BEPS minimum standard, CbCR has been implemented by over 100 countries including the G20 and the OECD member countries.
How was CbCR implemented in Switzerland?
The CbCR was introduced in the Swiss domestic law on 1 December 2017, and applicable form 2018, with a voluntary filing for 2016 and 2017. The Swiss CbCR filing obligation applies to MNE groups with a parent company resident in Switzerland and a turnover of more than CHF 900 million in the immediately preceding fiscal year.
What changes: What role does CbCR play under Pillar 2
To relieve the compliance burden for the MNE groups in scope of the Pillar 2 minimum taxation of 15%, the OECD introduced an interim measure to exclude MNE group’s operations in certain lower-risk jurisdictions from the scope of the GloBE Rules calculations in the initial years. The Transitional Safe Harbours largely relies on the MNE's CbCR data which significantly changes the purpose of the CbCR, increasing its importance for the MNE groups for the coming fiscal years.
The Transitional Safe Harbours consists of the following three tests to identify the lower-risk jurisdictions:
- de minimis test: The jurisdiction has total CbCR revenue of less than €10 million, and the CbCR profit (loss) before income tax is less than €1 million (including a loss) in the current year.
- A simplified effective tax rate (ETR) test: 'simplified covered taxes' divided by CbCR profit (loss) greater than 15% in 2023 and 2024 (16% in 2025, 17% in 2026).
- A routine profit test: The tested jurisdiction’s profit or loss before income tax for the jurisdiction is equal to or less than the substance-based income exclusion (SBIE) for constituent entities resident in that jurisdiction under the CbCR, as calculated under the GloBE Rules.
Meeting one of the three tests exempts the MNE group from performing a full GloBE calculation per each constituent entity in the respective jurisdiction, while effectively reducing the top-up tax to zero for that jurisdiction based on simplified calculations. It is important to note that the MNE group is not relieved from complying with group-wide GloBE requirements (e.g. the filing of a GloBE Information Return, and including the use of the Transitional Safe Harbours in a jurisdiction where applicable).
The Transitional Safe Harbours is limited to a transitional period. For MNEs with the calendar year as their fiscal year, this applicability for 2024, 2025 and 2026, i.e. the first three years of GloBE application in most countries, including Switzerland.
What are the key considerations?
- Qualified CbCR: The application of the Transitional Safe Harbours relies on 'Qualified CbCR', i.e. a CbCR prepared based on 'Qualified Financial Statements'. Qualified financial statements include both the consolidated financial statements of the ultimate parent entity and the separate financial statements of each constituent entity, provided these are prepared in accordance with an acceptable or authorized financial accounting standard and are reliable. For a Swiss MNE group, financial statements prepared in accordance with IFRS, US GAAP or Swiss GAAP FER should qualify.
- Simplified covered taxes: While the profit (loss) used in the computation of the Simplified ETR test is derived from the CbCR data, 'simplified covered taxes' are derived from the entity's financial statements instead of CbCR data. 'Simplified covered taxes' is defined as a jurisdiction’s income tax expense as reported in the MNE’s financial statements after eliminating any taxes that are not 'Covered Taxes' under GloBE and any uncertain tax positions. This presents a simplification compared to the 'Covered Taxe' under the GloBE Rules, not requiring multiple GloBE adjustments (e.g., the allocation of controlled foreign corporation taxes and taxes related to permanent establishments, elimination of valuation adjustments and accounting recognition adjustments, adjustment for deferred taxes, etc.).
- Once out, always out: If an MNE group has not applied the Transitional Safe Harbours with respect to a given jurisdiction in a fiscal year in which the MNE group is subject to the GloBE rules, the MNE group cannot qualify for this Transitional Safe Harbours for that jurisdiction in a subsequent year. This applies even if the MNE group would meet the safe Transitional Safe Harbours tests in the following years again. In other words, the first year of GloBE application is crucial for determination of the extent of the potential relief provided by the Transitional Safe Harbours. For the Swiss MNE groups this potentially will be the fiscal year starting on or after 1 January 2024.
- Deviations between QDMTT vs. GloBE Rules: The OECD has provided flexibility to the countries introducing Qualified domestic minimum top up tax (QDMTT) in their domestic legislation. A QDMTT need not fully follow the GloBE Rules, but it must be implemented and administered in a way that is consistent with the outcomes provided for under the GloBE Rules. Such deviations would obviously result in added complexity and increased compliance requirements. Some of the notable deviations permitted under QDMTT include: a narrower scope (revenue threshold below the €750 million), deviating allocation principles for the top-up taxes, different basis for financial information under QDMTT vs. GloBE, non-requirement for a SBIE, or non-existence of the transitional CbCR safe harbor, among many others. As for Switzerland, the Swiss QDMTT regime will be aligned with the GloBE Rules and the Swiss Federal Council intends to not opt for deviations from the GloBE Rules for the time being.
What are our recommendations?
To take full advantage of the Transitional Safe Harbours, one needs to take action on the following:- Data basis for qualified CbCR: Make sure that data used as a basis for the CbCR meets the requirements of 'Qualified Financial Statements' and the CbCR preparation process is sound and in line with the latest OECD guidance.
- Financial statement information: Ensure that the additional data prepared outside of the CbCR preparation process - which is required for the computation of the Transitional Safe Harbours tests (e.g. 'Covered Taxes')- is readily available, with a well-established process.
- CbCR timeline: to be able to assess whether the MNE group qualifies for the Transitional Safe Harbours in respective jurisdictions, the figures required for the Transitional Safe Harbours calculations need to be available before the financial year-end. This requires the CbCR data to be available already at that time, as opposed to the typical CbCR preparation deferred to months after the financial year-end.
- Interdependences: As there will increasing interdependencies between the CbCR, tax accounting under GloBE, along with the (non-) qualification for the Transitional Safe Harbours and any potential top-up taxes under QDMTT regime, there will be a need to establish a sound, robust process to facilitate such iterations and make the data readily available on a timely basis.
- Voluntary CbCR: The Swiss headquartered MNE groups that are below the revenue threshold of CHF 900 million should consider preparing a voluntary CbCR in order to be able to benefit from the Transitional Safe Harbours and minimize their Pillar 2 compliance obligations in the initial years.