Implementation of the OECD minimum tax rate in Switzerland
Switzerland introduced the OECD minimum tax rate on 1 January 2024. What are the implications of further implementing the minimum tax rate for the Federal Constitution, the tax system, the federal budget and the companies affected?
Brief summary
The OECD minimum tax rate is implemented in Switzerland by means of an ordinance. The people and cantons approved the necessary constitutional amendment in a popular vote on 18 June 2023. During its meeting on 22 December 2023, the Federal Council decided to implement the minimum tax rate with the introduction of a supplementary tax in Switzerland from 1 January 2024. On 4 September 2024, the Federal Council decided to bring the international supplementary tax under the income inclusion rule (IIR) into force with effect from 1 January 2025, thereby preventing base erosion and creating stable framework conditions. Within six years, the Federal Council must additionally submit to Parliament a federal act that replaces the ordinance.
Background
The existing taxation of large multinational enterprises is no longer appropriate in the view of the Organisation for Economic Co-operation and Development (OECD) and the Group of Twenty major developed and emerging economies (G20).
In October 2021, over 140 countries, including Switzerland, agreed that large multinational enterprises with turnover of EUR 750 million or more should pay at least 15% tax on their profits.
The vast majority of EU member states and other important industrialised nations have already implemented certain aspects of the minimum tax rate this year.
Constitutional amendment
On 18 June 2023, 78.5% of the electorate approved a constitutional amendment that creates the legal basis for implementing the minimum tax rate in Switzerland. One of the aims of the proposal's authors was to ensure that the receipts from higher taxation remain in Switzerland and do not flow abroad.
A transitional provision in the Constitution provides the Federal Council with guidelines on how it should implement the minimum tax rate. The Federal Council has issued an ordinance for this purpose. It will remain in force until it is replaced by a federal act. The Federal Council must submit this federal act to Parliament after six years at the latest.
Those concerned
Only large multinational enterprises with global annual turnover of at least EUR 750 million are subject to the new minimum tax rate. In Switzerland, this concerns a few hundred domestic and a few thousand foreign corporate groups. Thus, approximately 99% of companies in Switzerland are not directly affected by the reform and will continue to be taxed as before.
Taxation may turn out to be lower than 15% in all cantons. However, cantons with a low tax burden, where many large and profitable companies are based, will be particularly affected.
Supplementary tax in the ordinance
If the minimum tax rate is not reached, the shortfall will be levied by means of a supplementary tax. The supplementary tax is a federal tax. As with direct federal tax, it will be assessed by the cantons.
Firstly, with effect from 1 January 2024, the national supplementary tax (qualified domestic minimum top-up tax, QDMTT) ensures the minimum taxation of affected corporate groups or business units in Switzerland. Secondly, the international supplementary tax under the income inclusion rule (IIR) also ensures the minimum taxation of all foreign business units of a corporate group at the ultimate parent entity (or an intermediate holding company) if the business units in question are not subject to minimum taxation in other jurisdictions.
Impact
The financial impact of this minimum tax rate is unclear. It is estimated that receipts from the national supplementary tax will initially be roughly CHF 1 billion to CHF 2.5 billion. The first receipts are expected in 2026. One reason for the uncertainty when estimating is the limited pool of data. In addition, the assessment base in accordance with the OECD/G20 differs from that under Swiss law. Moreover, the estimate does not take account of potential behavioural adjustments by companies (e.g. in the form of lower investments in Switzerland) and tax policy decisions by the cantons (e.g. changes to profit tax rates).
With regard to the last aspect, various cantons are planning to increase their cantonal profit tax or have already decided to do so. As a result, it is likely that the revenue potential of the QDMTT for the federal government will be lower over time than in the first year.
The revenue potential of an international supplementary tax (IIR) is estimated to be roughly CHF 0.5 billion to around CHF 1 billion initially. The vast majority of jurisdictions will most likely themselves ensure the minimum tax rate is applied on their territory in future, in which case the receipts from an IIR would be of a temporary nature.
The OECD/G20 project makes Switzerland less attractive from a tax perspective. Any ensuing adjustments made by companies in the medium to long term could adversely affect the receipts from almost all taxes and also those from social security contributions. Consequently, some of the funds collected with the supplementary tax should be used to finance measures that benefit Switzerland as a business location. Tax competition within Switzerland will also tend to be slightly restricted. High-tax cantons will become more attractive relative to low-tax cantons. The administrative burden for companies and authorities will likewise increase.
Q&A on the implementation of the OECD/G20 minimum tax rate in Switzerland
Numerous jurisdictions of economic importance for Switzerland introduced the minimum tax rate with effect from 2024. These include, for example, most EU member states and other important industrialised nations such as the United Kingdom, Canada, Japan and South Korea. The information is without guarantee and is provided as a snapshot.
Certain EU member states that had not implemented the minimum taxation rules as at 31 December 2023, e.g. Greece, have since written the EU directives into national law.
The United Kingdom and Canada implemented the QDMTT and the IIR with effect from 2024. Japan and South Korea introduced the IIR on 1 April 2024 and 1 January 2024, respectively, but have refrained from introducing a QDMTT for the time being. Australia is planning to introduce the IIR and QDMTT with retroactive effect from 1 January 2024. Singapore has drafted legislation that provides for the introduction of an IIR and QDMTT with effect from 1 January 2025. There are still no signs of implementation in other major economies such as the United States or the BRIC countries.
With regard to the UTPR, neighbouring EU member states have confirmed that it was included in the legislative procedure for the introduction of the minimum taxation rules and will enter into force on 31 December 2024 without any further parliamentary resolutions (as at August 2024, a parliamentary resolution is expected in Liechtenstein). This generally applies to all EU member states that have transposed the EU directives into national law. The United Kingdom, Canada and Australia intend to introduce it by 2025, as do South Korea and Japan, although the parliamentary procedure still has to be carried out. Singapore has decided not to introduce a UTPR for the time being. In other jurisdictions, such as the United Arab Emirates, South Africa and Qatar, it is unclear whether the UTPR will be introduced with effect from 2025. There are currently no plans to introduce it in the United States or the BRIC countries.
Unlike the QDMTT, the IIR was not suitable for preventing base erosion in 2024, as the IIR would generally lead to a tax increase as long as the UTPR is not applied in other jurisdictions, without the threat of such an increase from abroad. Under these circumstances, however, the levying of taxes abroad was not an aim of the proposal's authors.
By not introducing the IIR, Switzerland has largely been able to maintain its attractiveness as a location for holding companies in 2024, as subsidiaries of Swiss corporate groups abroad can continue to benefit from lower taxation for the time being, provided they are located in jurisdictions that do not (yet) implement minimum taxation. The same applies to Swiss intermediate holding companies of corporate groups from jurisdictions without the IIR.
However, not ensuring minimum taxation abroad has created an incentive for Swiss corporate groups to shift profits and activities to low-taxed foreign subsidiaries. But it is worth noting here, too, that the quicker minimum taxation is implemented internationally, the less likely such behavioural adjustments will be.
The introduction of the UTPR planned for 2025 by the vast majority of EU member states and a few other important industrialised nations will change the backdrop compared to 2024, in that the Swiss IIR will also appear both appropriate and necessary from that time onwards in order to prevent substantial base erosion. It will shield Swiss corporate groups and their intermediate holding companies in jurisdictions that have not introduced an IIR from the application of a foreign UTPR.
For corporate groups from jurisdictions that have introduced the IIR, the QDMTT does not represent an additional tax burden, as the jurisdiction in which the company's registered office is located would apply the IIR and would enforce the minimum tax rate of 15% anyway. At a rough estimate, this affects 1,000 corporate groups, including the Swiss arms of European corporate groups. For these companies, the QDMTT also provides increased legal certainty and reduces the administrative burden, primarily because of the QDMTT safe harbour, from which these corporate groups may benefit and which is intended to protect them from additional assessment procedures abroad.
By contrast, for other corporate groups affected by the reform, namely Swiss and US groups, the QDMTT will result in higher taxes if their profits are currently taxed at less than 15% in Switzerland. If Switzerland had chosen not to introduce the QDMTT, they would have been affected by minimum taxation (through the UTPR) from 2025 at the earliest. The available data indicates that probably more than half the potential receipts from the QDMTT will be levied on these corporate groups.
Nevertheless, tax burdens of less than 15% are still possible if the company can apply the substance carve-out. The substance carve-out allows companies with considerable assets in the form of tangible fixed assets and payroll costs to continue to have a portion of their profits taxed at a rate lower than 15%. In the first year, the substance carve-out amounts to 10% of the payroll costs plus 8% of the tangible fixed assets. After the transition period, profits amounting to 5% of the payroll costs and tangible fixed assets can benefit from the substance carve-out. Locations with many high-substance corporate groups are therefore less affected by the minimum tax rate than locations where many low-substance activities are carried out.
The aim of the IIR is to shield against the use of a foreign UTPR with respect to the profits of Swiss corporate groups, as well as Swiss intermediate holding companies of corporate groups from jurisdictions that have not introduced an IIR.
As the vast majority of the profits still taxed at a rate of less than 15% would be subject to the UTPR of other jurisdictions in any case, the IIR's entry into force in Switzerland would entail hardly no locational disadvantages. On the contrary, refraining from implementing the IIR would tend to have a negative impact, as it would mean losing out on receipts that could otherwise be used to strengthen Switzerland as a business location. The Confederation is obliged to use the supplementary tax receipts, less its additional fiscal equalization burden, for measures to promote Switzerland as a business location. It is also becoming apparent in various cantons that at least some of the additional receipts will be used to maintain Switzerland's locational appeal.
Furthermore, the entry into force of the IIR in Switzerland will protect Swiss corporate groups from additional tax procedures and from the application of the UTPR abroad.
While it is true that, if the UTPR came into force in 2025, Switzerland would earn receipts that would otherwise be siphoned off by other countries, it is likely that the revenue potential of a UTPR would be significantly smaller than that of the IIR. The general government receipts from a UTPR could amount to a low three-digit figure in the millions.
It can be assumed that almost all corporate groups would be covered by the UTPR initially. It is also likely that most of these corporate groups will be unable to avoid the UTPR in the long term. However, corporate groups with highly digitalised business models could be an exception.
Unlike with the IIR, whose entry into force means that Swiss corporate groups will not be confronted with the processing of the UTPR abroad, there would be no administrative advantage to bringing the UTPR into force in Switzerland.
But legal uncertainties would increase. Discussions are still ongoing in international circles regarding the UTPR's conformity with international law and treaties.
When considering the interests at stake, the legal and economic policy uncertainties and risks clearly outweigh the comparatively low revenue potential of a UTPR.
It is difficult to gauge either the short- or long-term financial impact of the supplementary tax. Some reasons for this are as follows:
The limited pool of data: it is not possible, for example, to determine the corporate groups affected, as the available statistics are based on individual companies rather than on corporate groups.
Different assessment bases: the rules established by the OECD/G20 for the determination of profits differ from those applicable in Switzerland. These differences may lead to higher or lower receipts from the supplementary tax.
Possible behavioural adjustments: since there are no historical empirical values, it is unclear whether other jurisdictions will adjust their tax and subsidy systems, or whether companies will adjust their structures and investments. Moreover, the cantons have autonomy in setting profit tax scales. Some cantons have already made use of their leeway.
It is estimated that the receipts from the national supplementary tax will amount to roughly CHF 1 billion to CHF 2.5 billion in the first year. The federal government has included receipts of CHF 1.6 billion in the financial plan from 2026 onwards – CHF 400 million for the Confederation and CHF 1.2 billion for the cantons. Such tax receipts may be counteracted by opposing effects: the OECD/G20 minimum tax rate will make Switzerland less attractive from a tax perspective. This could cause large corporate groups to invest less in Switzerland, for example, or to decide not to establish a base in Switzerland. This would affect not only receipts from profit and supplementary tax, but also receipts from other kinds of tax (principally income tax) and social security.
The revenue potential of an international supplementary tax (IIR) is initially estimated to be roughly CHF 0.5 billion to around CHF 1 billion. The vast majority of jurisdictions will most likely themselves ensure the minimum tax rate is applied on their territory, in which case the Swiss receipts would be of a temporary nature.
Finally, some cantons have already decided to adjust their profit tax scales. Receipts from the supplementary tax will therefore be lower, but this will be offset by a rise in receipts from cantonal profit tax due to the adjustments in cantonal tax scales. As regards the various levels of government, the cantons should generate more receipts overall; conversely, federal receipts are likely to be lower than they would be without the cantons' tax policy decisions.
The constitutional provision stipulates that 75% of the additional receipts from the supplementary tax go to the cantons and 25% to the Confederation. Cantons which currently levy tax of less than 15% and which host many corporate groups affected by the minimum tax rate will also earn more revenue from the supplementary tax than other cantons. At the same time, these are the cantons most affected by the additional tax burden and the loss of locational attractiveness. The profit tax scale in the cantons is not the only deciding factor. The tax burden may also be lower than 15% in cantons where the profit tax scale is higher than 15% – for instance if a company is able to claim tax relief for research and development.
The Constitution stipulates that the federal government must use its additional receipts to promote Switzerland as a business location (less its additional expenditure for fiscal equalization and cost compensation resulting from the supplementary tax). Most cantons are also planning measures to promote locational appeal, as shown by an initial survey:
The additional receipts from the supplementary tax will be taken into account in the existing fiscal equalization system, i.e. there will be a redistribution via fiscal equalization, from which the financially weaker cantons will benefit. In this way, those cantons which do not directly earn revenue from the supplementary tax can also achieve additional receipts.
In the medium term, the federal government will allocate around a third of its receipts from the supplementary tax to offset its additional fiscal equalization burden. The remaining funds are to be used for measures to foster Switzerland's locational appeal in the following areas: for the digital transformation of public services, for decarbonising companies and for financing growth in the fields of education, research and innovation.
The OECD/G20 minimum tax rate applies to corporate groups with global annual turnover of at least EUR 750 million. The minimum taxation mechanism is based on three measures:
QDMTT (also: national supplementary tax): with the qualified domestic minimum top-up tax (QDMTT), a jurisdiction covers the companies domiciled there that are taxed at less than 15%. It applies to domestic and foreign corporate groups. In Switzerland, the QDMTT will be ensured in the form of a national supplementary tax. Example: the QDMTT covers the profits of Swiss companies and those of Swiss-domiciled companies of foreign groups, meaning that their profits will be taxed at 15% from 2024 onwards
IIR: with the income inclusion rule (IIR), a jurisdiction includes the (excessively) low-taxed foreign subsidiaries of companies domiciled in its territory. The IIR applies to domestic corporate groups with subsidiaries abroad that are taxed at less than 15%, as well as to foreign corporate groups with an intermediate holding company in Switzerland and whose foreign subsidiaries are (excessively) low-taxed. Example: the IIR covers the profits of subsidiaries of Swiss corporate groups or intermediate holding companies if these are taxed at less than 15% in their country of domicile.
UTPR: with the undertaxed payments rule (UTPR), a jurisdiction covers any other (excessively) low-taxed foreign group companies of companies domiciled in its territory. Example: the UTPR covers the profits of subsidiaries of a foreign corporate group that also has an arm in Switzerland.
Priorities:
As a first priority, a jurisdiction can itself ensure minimum taxation on its territory by means of a QDMTT.
If it does not make use of this option, the jurisdiction of the ultimate parent entity can levy tax by means of the IIR, and subsidiarily the jurisdiction of the intermediate holding company.
If no jurisdiction levies the QDMTT or applies the IIR, the other jurisdictions in which any group company is located can levy tax under the UTPR.
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