With the developments over the last couple of weeks, an international agreement on the new taxation rules introduced by BEPS 2.0 seems more likely than ever. The introduction of new taxing rights for market jurisdictions and of a global minimum tax will also impact Swiss based international groups.
In their June 5 communiqué, the Finance Ministers and Central Bank Governors of the G7 states agreed on concrete actions and expressed their support for the "efforts underway through the G20/OECD Inclusive Framework to address the tax challenges arising from the globalisation and the digitalisation of the economy and to adopt a global minimum tax" – also often referred to as BEPS 2.0.
They "commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises".
Also, they "will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies".
Further, they "also commit to a global minimum tax of at least 15% on a country by country basis.“
1. Awarding taxing rights to market countries (Pillar One)
The scope of Pillar One has already been expanded significantly beyond the digital economy to include consumer-facing businesses. It should be expected that this wider scope remains and that only few carve outs will be granted. It is currently unclear which and how many enterprises will be in the scope of the „largest and most profitable companies“, particularly whether the application of these new rules will be limited to the 100 largest companies as proposed by the United States - however, this seems increasingly unlikely.
In light of all these developments, it should be assumed that a number of Swiss headquartered groups will also be affected by the new rules and will have to surrender a part of the residual profit - currently subject to taxation only in Switzerland - to the market jurisdictions. International headquarters of foreign groups (namely US groups) will be affected in a similar way.
It is currently difficult to quantify the impact of these new measures on Swiss tax revenues, but if large Swiss groups and headquarters become subject to these new rules, this will hardly be compensated by additional taxing rights that Switzerland will receive as a (small) market jurisdiction.
2. Global minimum tax (Pillar Two)
The most radical change that Pillar Two introduces, is the fact that the minimum tax mechanisms will be applied irrespective of whether a company that is taxed at a rate below 15% carries out an active business with appropriate substance or merely earns passive income with limited or no substance.
Many details, for example the computation of the tax rate or possible carve-outs still need to be confirmed. It should be expected though, that exceptions and carve-outs for Pillar Two will be very limited and restrictive. 18 of the 26 Swiss cantons currently have ordinary effective tax rates below the communicated 15% rate. This means that many of the groups and headquarters located in these cantons will become subject to the mechanisms of Pillar Two (if the rates are not increased accordingly for the companies in scope).
For Switzerland, it will be particularly important how the US will implement the global minimum taxation rules, namely what minimum rate they will apply, whether they will stick to the country-by-country approach and what carve-outs they will offer. The current Biden proposal foresees a 21% GILTI rate (in a simplified way the US minimum tax rate applied on foreign investments) and a country-by-country approach.
In consideration of Switzerland’s position in the international competition for attracting foreign investment, a 15% minimum rate would still allow Switzerland to remain competitive on a level playing field, i.e. if changes were the same for all participating countries.
Still, Switzerland must make some important decisions at the tax policy front quickly - namely whether the rules of Pillar Two like the “income inclusion rule” or the “undertaxed payments rule” should be introduced and whether the tax rates applied on the profits of international groups should be lifted to the global minimum tax level. Both measures would target the safeguarding of Switzerland’s share in the global reallocation of taxable profits and tax substrate.
While many details are still vague, it must be assumed that these new international tax rules will be implemented as a matter of priority by many (high tax) countries involved, given the budgetary challenges that the global pandemic has created. The current ambitions and expectations are that an agreed package will be ready by October 2021.
The last few weeks have produced increasing political support and alignment for the BEPS 2.0 plans and established a clearer direction where the global minimum tax rate might land. Companies now need to understand if and how they will be impacted by these plans. A high level and broad analysis will be helpful to address the most immediate information needs that the G7 announcement will undoubtedly trigger with board members and at C-level, which can be assisted with KPMG’s proprietary tools. As the rules and plans become more specific, this analysis can then be refined, and scenarios can be developed.
More details on the BEPS 2.0 plans and on how companies can prepare for the changes can be found in our earlier publication.