Taxation of the digital economy
The OECD/G20 project to prevent base erosion and profit shifting (BEPS) aims, among other things, to improve the international tax system and tax fairness between traditional and digital companies. In 2021, the states involved resolved to introduce a two-pillar approach in response to the challenges related to the taxation of the digital economy.
The OECD's two-pillar approach
- Pillar One: Pillar One aims to ensure fairer distribution of profits and taxation rights between countries by reallocating taxing rights over multi-national enterprises (MNEs) in the markets in which the companies operate and earn profits, regardless of whether firms have a physical presence there (market jurisdiction taxation). In principle, MNEs with global revenues of more than EUR 20 billion and profitability of more than 10 percent are affected. The corresponding regulation is planned to enter into force on 1 January 2024.
- Pillar Two: Pillar Two aims to introduce global minimum taxation of 15 percent for MNEs and thus reduce tax competition between countries. In principle, MNEs with global revenue of more than EUR 750 million are affected (the individual countries can also provide for a lower revenue threshold). The corresponding regulation is to enter into force on 1 January 2023.
For more information, please refer to the following link: Taxation of the Digital Economy - BDO
Implementation in Switzerland
The Federal Decree on special taxation of large corporate groups is to serve as the basis for the implementation of Pillar Two (minimum taxation) of the OECD/G20 project on the taxation of the digital economy in Switzerland (22.036). The Federal Council submitted a corresponding dispatch to Parliament on 22 June 2022.
The aim is to introduce the new international taxation rules in Switzerland. The legal basis for the implementing legislation is to be created by amending the Federal Constitution. Until these legal arrangements are effective, the minimum taxation is – in view of its urgency – to be introduced by means of a temporary ordinance. This should ensure that the additional tax revenues can be collected in Switzerland rather than abroad. In addition, Switzerland's competitiveness is to be maintained and conditions created to ensure that jobs and tax revenues are maintained in Switzerland. Despite the introduction of new rules to ensure minimum taxation, it should be ensured that tax federalism between the cantons is maintained. The Council of States approved the OECD/G20 project and its implementation in Switzerland on 28 September 2022.
Which companies are affected by minimum taxation?
According to OECD guidelines, only MNEs with an annual turnover of at least EUR 750 million fall under the Global Anti-Base Erosion (GLoBE) rules, which provide for minimum taxation of 15 percent on the basis of an internationally standardised assessment base. This turnover threshold of EUR 750 million is also to be applied in Switzerland. Large companies operating exclusively in Switzerland and SMEs are not affected by the new rules.
Compliance with the minimum taxation of 15 percent is determined based on a company’s annual financial statements prepared according to an internationally accepted accounting standard and taking into account the GloBE-specific adjustments and corrections. Affected companies that prepare their annual financial statements in accordance with the basic principles of the Code of Obligations will need to consider whether the local financial statements should be converted to an internationally accepted standard.
What measures are planned to implement the OECD rules on minimum taxation in Switzerland?
The transitional provision in the Federal Constitution provides for the creation of a “supplementary tax” to implement minimum taxation in Switzerland. This Swiss supplementary tax (known as qualified domestic minimum top-up tax) should ensure minimum taxation of affected groups and their business units in Switzerland. In addition, Switzerland should be able to make use of the new taxation rights if a group of companies operating in Switzerland does not meet the minimum taxation abroad (under what is known as the income inclusion rule (IIR) and undertaxed payments rule (UTPR)). These measures ensure that the additional tax revenues resulting from minimum taxation accrue to Switzerland and not to other states. The introduction of the Swiss supplementary tax ensures the required minimum taxation in Switzerland, protecting companies and business units domiciled in Switzerland from additional tax proceedings abroad.
In this context, it is important that the Swiss regulations comply with the OECD/G20 Model Rules. Otherwise, there is a risk of double taxation in Switzerland and abroad.
As a direct federal tax, the supplementary tax is to be enforced by the cantons. With this federalist implementation, the cantons are still incentivised to offer competitive tax burdens. At the same time, the additional tax revenues of the cantons are taken into account in the national fiscal equalisation (NFA).
According to the transitional provision, the Confederation receives 25 percent of the additional revenue. The remaining 75 percent remains with the cantons.
In view of the numerous uncertainties, the Federal Council advocates a staggered approach to national implementation. In a first step, a new constitutional regulation should give the Confederation the power to implement the OECD/G20 project. A transitional provision in the Federal Constitution should authorise the Federal Council to temporarily govern minimum taxation by ordinance. The federal vote on the necessary constitutional amendment is expected to take place on 18 June 2023. A consultation is currently under way (until 17 November 2022) on the draft ordinance of the Federal Council on the minimum taxation of MNEs. The amendment of the Federal Constitution and the enactment of the Ordinance would allow the new provisions to enter into force in Switzerland as early as 1 January 2024. The ordinance is then to be replaced by a corresponding federal act at a later date.
Need for action
In a first step, we recommend checking whether your companies or business units in Switzerland are subject to the minimum taxation rules (part of a multinational group with global revenues of more than EUR 750 million?).
If your company's financial statements are not prepared in accordance with an internationally accepted standard, you should consider how the local financial statements could be converted to an internationally accepted standard.
Finally, we recommend analysing for the year 2023 whether there is a risk that other countries will enforce the minimum taxation of companies or business units in Switzerland (taxation of companies or business units in Switzerland by other countries). This would be the case if your multinational group has companies or business units in a country that has – before Switzerland – already introduced minimum taxation in 2023.