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Switzerland: Accounting for income tax; Q&As on tax reform implications

Switzerland: Accounting for income tax; Q&As tax reform

EXPERTsuisse—the organization of Swiss certified auditors, tax and fiduciary experts, and companies—has prepared a report in “question and answer” (Q&A) format that is intended to answer questions that may arise due to the changes of the tax laws as a result of the Federal Act on Tax Reform and AHV Financing (TRAF) and may have implications on the accounting for income tax under the guidance of IFRS.

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The report of Q&As and other statements are limited to changes in the tax law with respect to corporate taxpayers and income taxes, and the Q&As caution that they do not include other changes or topics outside of IFRS and income taxes for corporate taxpayers. However, similar considerations may be applied under Swiss GAAP FER, according to the Q&As.

Read the Q&As provided by EXPERTsuisse [PDF 180 KB] (released 5 July 2019)

According to a KPMG report, there are three important areas from the Q&As to consider:

  • Substantial enactment. The federal reform is substantially enacted as of 19 May 2019 for IFRS. However, because the tax reform needs to be adopted by the cantons in cantonal tax laws, the legislative procedures of both the federal and cantonal reforms must be substantively completed to be seen as substantially enacted for IFRS purposes. Consequently, relevant substantive enactment is the date of the final decision on cantonal reform (i.e., public vote or expiry of the deadline for calling a referendum). The enactment of the cantonal income tax law results very often in reduced applicable tax rates and therefore re-measurement of deferred taxes.
  • Repeal of special tax regimes transitional measures (e.g., mixed and holding companies). TRAF provides for two transitional measures on cantonal level, the (current law) step-up and the dual rate approach. If a company applies the step-up mechanism, this reflects a change in the tax base and therefore affects the temporary differences of a company by either creating a deductible temporary difference or reducing existing taxable temporary differences. Consequently, the step-up results in a deferred tax asset at the future ordinary tax rate or decreases a pre-existing deferred tax liability. The recognition of a deferred tax asset remains subject to the general analysis of recoverability. If the dual rate approach is applied, the tax base will not be impacted and consequently this measure does not impact the temporary differences. The dual rate approach can result in a reduced tax rate for temporary differences reversing in the next five years.
  • Other measures. The benefits of the other measures—in particular the R&D incentive, notional interest deduction, and patent box—are to be treated as a reconciling item.

Read a July 2019 report prepared by the KPMG member firm in Switzerland

Background

Swiss voters on 19 May 2019 approved the TRAF confirming the reform of corporate taxation in Switzerland. The tax reform generally focuses on legal certainty and investor confidence and pursues the following three objectives:

  • Safeguarding the tax competitiveness of Switzerland as a business location
  • Promoting the international acceptance of Switzerland’s corporate tax legislation
  • Ensuring sufficient tax revenues to finance public activities

The reform has several consequences including a change of the Swiss Cantonal and Communal Income Tax Harmonization Act (CCITHA) which defines a general framework providing mandatory and / or voluntary guidance on provisions in the cantonal tax laws for income and capital taxes.

The changed CCITHA is scheduled to be effective at federal level on 1 January 2020.

To the extent that the tax reform measures relate to cantonal and communal income tax law changes, the measures will effectively be implemented through modification of the cantonal tax law. In addition to the changes resulting from the CCITHA, many cantons are also expected to lower their statutory income tax rates. Among the tax measures available for the cantons to implement either voluntarily or mandatorily within TRAF are the following:

  • Repeal of special tax regimes—mandatory.
  • Transitional measures to consider the treatment of hidden reserves including “goodwill” (dual rate approach)—mandatory. Cantons can set both the ordinary rate and the separate rate.
  • Additional deduction for qualifying research and development (R&D) (up to 50%)—optional.
  • Patent box, tax exemption of up to 90% of qualifying income—mandatory. Cantons can choose the exemption rate to apply, up to the 90% maximum.
  • Notional interest deduction on equity (only applicable for cantons with high tax rates such as Zurich).
  • Overall limitation of certain measures on cantonal level. The benefits from certain measures are limited to 70% (or less, at the choice of the canton) in order to provide for minimal taxation.


Read more about tax reform on the website of the KPMG member firm in Switzerland.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

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