Jurisdictions around the world are continuing to release draft legislation to implement the OECD’s global minimum tax (pillar two, or the GloBE Rules) into domestic law. As we experience the transition into a new global system of taxation, it is crucial for multinational enterprise groups (MNE Groups) in scope of the rules to monitor developments in the jurisdictions in which they operate. Switzerland is home to many MNE Groups in scope: more than 2,000 companies located in Switzerland are expected to be impacted by the reform, according to the Swiss federal government.
In June 2022, the Swiss federal government introduced its roadmap to implement the GloBE Rules into domestic legislation, which would make the GloBE Rules applicable as of January 1 2024. Most recently, on December 16 2022, the Swiss parliament passed an amendment to the Swiss constitution, which is subject to a popular vote that is scheduled for June 18 2023. If the referendum passes, the federal government can continue with the implementation plan.
Based on the current plans published by the federal government, it is expected that the Swiss implementation of the GloBE Rules will correspond to the EU directive’s intention to apply the income inclusion rule (IIR) and a qualified domestic minimum top-up tax (Q/DMTT) for financial years starting on or after January 1 2024. The initial draft provided for the incorporation of the undertaxed profits/payments rule (UTPR), although Deloitte Switzerland expects the Federal Council to follow the EU directive and delay implementation of the UTPR to 2025.
With the incoming rules and related disclosure and reporting obligations, MNE Groups preparing for the impact welcome every relief provided by the GloBE Rules. In December 2022, the OECD issued guidance which included a transitional country-by-country reporting (CbCR) safe harbour and a leverage of existing transfer pricing/transparency legislation to support administrative simplifications to enter into pillar two taxation. Thus, the rules provide for an interim measure to exclude a group’s operations in lower-risk countries from the compliance obligation of preparing full pillar two calculations. It applies for years beginning on or before December 31 2026.
1. Transitional CbCR safe harbour rules
1.1. Background
The administrative burden and resources required to cope with the impact of the GloBE Rules may be eased through applicable safe harbours. The intention of the transitional safe harbour is to provide an administrative simplification for an interim period lasting until June 30 2028 at the very latest (ending on December 31 2026 in most instances).
In the spirit of simplification, the transitional CbCR safe harbour rules rely on CbCR of an MNE Group in scope and three alternative tests, to document the ‘low-risk’ nature of a jurisdiction triggering a top-up tax liability. The three tests are based on a ‘qualified CbCR’, which means the MNE Group has prepared its CbCR using qualified financial statements and the CbCR provides reliable information regarding all the income of the MNE Group. The tests are:
A de minimis test – less than €10 million (approximately $11 million) qualified CbCR revenue, and less than €1 million qualified CbCR profit (loss);
A simplified effective tax rate (ETR) test – simplified covered tax divided by qualified CbCR profit (loss) greater than 15% (16% in 2025, 17% in 2026); and
A routine profit test – substance-based income exclusion greater than qualified CbCR profit (loss).
Considering the transitional CbCR safe harbour is intended to apply only as a temporary relief, meeting one of the three tests exempts the MNE Group from performing a full GloBE calculation per each constituent entity in a respective jurisdiction for the interim period only. However, if none of the three tests is met, then the full-scope GloBE ETR calculations would need to be established for the jurisdiction. As soon as it is not possible to meet a safe harbour test, then the safe harbour option will no longer be available for the respective jurisdiction (‘once out, always out’).
1.2. Benefits and risks of the safe harbour
As implied, the application of the GloBE safe harbour provides for temporary relief with regard to the level of detail required in the GloBE information return (GIR). Meeting a safe harbour allows an MNE Group to treat a jurisdiction as ‘low risk’ and elect to waive detailed compliance procedures with regard to the respective jurisdictions and the requirement to determine a ‘top-up tax’ in accordance with the GloBE Rules. However, the safe harbour election does not waive GloBE considerations in full:
The GloBE safe harbour extends the transition period, hence transactions in jurisdictions in scope need to be qualified in accordance with the transition rules; losses incurred in a jurisdiction (triggering the routine profit test being met) would need to be checked against a GloBE loss and a corresponding GloBE loss deferred tax asset;
Hence, MNE Groups in scope need to be able to establish their GloBE income in accordance with the GloBE Rules – even when applying the GloBE safe harbour to establish the adjusted covered taxes in the transition year;
The application of the GloBE safe harbour for a specific period is tested with ‘actual’ data of the respective period (i.e., FY 2024 is tested against FY 2024 qualified CbCR data); and
Last but not least, domestic minimum tax regimes may not provide for a safe harbour exemption (like the recently published Liechtenstein draft legislation).
1.3. Practical implications based on the ‘Swiss view’
To benefit from the transitional CbCR safe harbour, an MNE Group in scope of the GloBE Rules needs to rely on a ‘qualified CbCR’. Swiss federal law does not define a qualified CbCR. As such, a qualified CbCR is derived from interpretation of the transitional CbCR safe harbour, with consideration of the GloBE Rules for further guidance:
Financial information for the qualified CbCR should generally derive from qualified financial statements. For a Swiss MNE Group, financial statements prepared in accordance with IFRS, US GAAP or Swiss GAAP FER should qualify. If an MNE Group prepares on the basis of other financial accounting standards, the data would likely fail the ‘reliable information’ requirement.
For purposes of calculating the simplified ETR test, the ‘simplified covered tax’ component is derived from the tax expense as reported on the financial statement (adjusted for the elimination of accruals related to uncertain tax positions).
One item to be considered from a Swiss perspective is understanding the treatment of net-wealth taxes. Under IAS 12, these taxes are recorded above the line and would not be included in the simplified covered tax, considering the reference to below-the-line income taxes only. However, taking into account the treatment of Swiss net-wealth taxes as ‘covered taxes’ under the GloBE Rules and the possibility to include such taxes for a Swiss CbCR, a qualified CbCR should account for net-wealth taxes.
The routine profit test provides for the requirement to analyse the constituent entities in scope of CbCR and the GloBE Rules and the determination of the ‘allocation’ of such constituent entities to a respective jurisdiction. In addition, interpretation of the GloBE Rules and the CbCR Agreement would indicate a deviation of the entities in scope. The GloBE Rules provide for a more extensive scope compared with CbCR and a qualified CbCR will need to address the respective gaps in CbCR.
1.4. Impact on the CbCR and GloBE procedures
It is recommended that MNE Groups in scope of the GloBE Rules revisit their CbCR procedures in 2023 and adopt changes to their reporting processes for FY 2022 already. This will help in ensuring that companies provide a consistent and reliable basis in determining their focus jurisdictions for GloBE purposes as they continue their implementation journey and documentation of the potential impact of the enacted GloBE Rules.
Furthermore, considering the administrative burden triggered by ‘failing’ the GloBE safe harbour tests, preparation of a qualified CbCR should be prioritised and move towards an earlier slot in the year, compared with the traditional late ‘tasks’.
Lastly, MNE Groups that are not in scope of Swiss CbCR obligations (i.e., with a revenue below CHF 900 million, or approximately $1 billion) should not consider themselves safe, considering the transitional GloBE safe harbour relies on CbCR. The establishment of voluntary CbCR may be recommended in these fact patterns to benefit from the transitional GloBE safe harbour and escape early detailed reporting requirements.
2. Domestic minimum top-up taxes in Switzerland
The Q/DMTT received special attention in the OECD’s Administrative Guidance, considering the ‘priority’ given to the Q/DMTT over the IIR and UTPR; in particular, the focus on controlled foreign company (CFC) regimes and recommendation to treat a Q/DMTT as ‘covered taxes’ for a CFC regime. Administrative simplifications provided with the GloBE safe harbour may be alienated. A growing number of Q/DMTT regimes may need to be considered within the global profile of an MNE Group.
2.1. Background
The importance of a Q/DMTT will certainly elevate over time and an increasing focus on Q/DMTT regimes and their deviations from the GloBE Rules is required to determine the impact on MNE Groups. The Administrative Guidance provides clearer direction with regard to such Q/DMTT regimes. Contrary to the hoped-for requirement of a strict and close alignment with the GloBE Rules, the significantly expanded definition of a Q/DMTT regime provides for numerous deviations:
Jurisdictions may impose a narrower scope and the Q/DMTT regimes could apply to MNE Groups with a global revenue below the €750 million threshold for entities in the respective jurisdictions.
Q/DMTT regimes may deviate from the allocation principles of top-up taxes stipulated in the GloBE Rules. The proposed allocation of the top-up taxes determined with regard to Switzerland to the Swiss constituent entities deemed to be ‘low-taxed’ constituent entities on a standalone basis would be a respective example.
Underlying financial information forming the basis of the Q/DMTT may not be in full conformity with the GloBE Rules. Implying that the Q/DMTT deviates from consolidated financial statements would significantly increase the compliance burden and increase the number of data points to be collected. Rather than one additional layer of taxation, such a Q/DMTT regime would result in a second additional layer of taxation – the requirement to benchmark the Q/DMTT against the GloBE Rules remains.
While there is a requirement to adopt deferred tax accounting rules for Q/DMTT regimes, the definition of covered taxes could be narrower than in the GloBE Rules and substance-based income exclusions are not required, either.
A growing number of Q/DMTT regimes would require compliance with the GloBE Rules, and compliance with local obligations and management of such deviations as well. The additional layer of complexity should not be taken lightly, and appropriate and continuous monitoring of local developments is therefore required to understand disclosure requirements in a timely manner.
2.2. Swiss perspective
Switzerland, with a domestic headline tax rate below 15%, is expected to be impacted by the GloBE Rules in multiple scenarios. Hence, a Q/DMTT will be implemented, which is expected to align closely to the GloBE Rules. Swiss statutory financial statements decisive for Swiss tax purposes are based on the principle of ‘prudence’ rather than ‘true and fair view’ and neglect the temporary differences and deferred tax accounting that would not meet the definition of an acceptable financial accounting standard, in accordance with the GloBE Rules. Therefore, the design of the Swiss Q/DMTT will introduce complexities for MNE Groups in scope. One expected challenge is the availability and establishment of financial accounts used for the GloBE tax base computation. While the majority of rules are expected to align closely, there will be some notable differences from the GloBE Rules, including:
Consideration of the ‘allocable share’ of top-up taxes to the MNE Group/ultimate parent entity or partially owned parent entity may be disregarded (i.e., all GloBE income/adjusted covered taxes in Switzerland would be considered); and
Top-up taxes under Q/DMTT will be allocated to the Swiss constituent entities triggering the top-up taxes, rather than based on GloBE income.
Given the expected additional tax layer computation, MNE Groups in scope should expect to prepare for the additional process and procedures to generate an additional set of accounts that meet the requirements set forth under the GloBE Rules and prepare for filing both a Swiss Q/DMTT return and the GIR in Switzerland.
3. Evaluation and outlook
The GloBE safe harbour may provide for a significant reduction of compliance obligations in relation to covered jurisdictions. As such, the desire for more permanent solutions is evident.
Both the transitional GloBE safe harbour and the Administrative Guidance indicate the ongoing work on a Q/DMTT safe harbour and potentially a continuation of an adapted simplified covered tax concept. While a qualifying Q/DMTT safe harbour would provide an MNE Group ‘tax certainty’ (a top-up tax to be collected under IIRs or UTPRs for a certain jurisdiction is set to zero) and prevent disputes in the case of Q/DMTT regimes, the compliance obligation with regard to the Q/DMTT would remain.
