The most important questions and answers on the OECD minimum tax
Published: Monday, Jan 1st 2024, 15:50
Updated At: Monday, Jan 1st 2024, 15:50
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Switzerland is implementing part of the OECD minimum tax reform at the turn of the year. The most important questions and answers at a glance:
WHAT IS THE STARTING POINT?
According to the Organization for Economic Cooperation and Development (OECD) and the Group of Twenty (G20), the current taxation of large, internationally active corporate groups is no longer fit for purpose. In October 2021, over 140 countries, including Switzerland, committed to a global minimum tax of 15 percent.
WHO IS AFFECTED?
Only large, internationally active corporate groups with an annual worldwide turnover of at least 750 million euros are subject to the new minimum taxation. In Switzerland, this includes a few hundred domestic and a few thousand foreign corporate groups. Roughly 99 percent of companies in Switzerland are therefore not directly affected by the reform and will continue to be taxed as before. Cantons with a low tax burden, in which many large and profitable companies are located, are particularly affected by the reform.
HOW IS SWITZERLAND IMPLEMENTING THE REFORM?
A transitional provision in the constitution provides the Federal Council with guidelines on how to implement minimum taxation. It is implemented by means of an ordinance that regulates the introduction of a supplementary tax in Switzerland. The supplementary tax is a federal tax. As with direct federal tax, it is assessed by the cantons. Within six years, the Federal Council must also submit a federal law to parliament to replace the ordinance.
ARE THERE ANY EXCEPTIONS?
Tax charges of less than 15 percent are still possible if the company has assets. The substance deduction allows companies that have a lot of tangible assets and staff to continue to be taxed at a lower rate than 15% on part of their profits. In the first year, the substance deduction amounts to 10 percent of payroll plus 8 percent of tangible fixed assets. After the transition period, profits amounting to 5% of the payroll and tangible fixed assets can benefit from the capital deduction.
WHAT ARE THE FINANCIAL CONSEQUENCES FOR THE FEDERAL GOVERNMENT?
The financial impact of minimum taxation is uncertain. The revenue from the supplementary tax is initially estimated at roughly one to two and a half billion Swiss francs. The estimate does not take into account possible changes in corporate behavior, for example in the form of lower investments, in Switzerland and tax policy decisions by the cantons, for example by adjusting the profit tax rates. The Federal Council will decide in 2024 on the specific use of the funds, which should benefit the economy as a whole.
WHAT ARE THE FINANCIAL CONSEQUENCES FOR THE CANTONS?
The OECD/G20 project makes Switzerland less attractive from a tax perspective, especially the low-tax cantons. To ensure that companies remain in Switzerland, part of the money collected through the supplementary tax is to be used to finance measures that benefit Switzerland as a business location. Tax competition also tends to be restricted within Switzerland. High-tax cantons will become more attractive in relation to low-tax cantons.
WHAT DOES THE SOVEREIGN SAY?
In Switzerland, the people and cantons approved the constitutional amendment required to implement the reform at the ballot box on June 18, 2023 with 78.5 percent of votes in favour.
WHAT ARE THE OTHER COUNTRIES DOING?
The vast majority of EU member states and other important industrialized countries also want to implement minimum taxation by 2024. However, there will be delays in individual EU member states, probably in Greece, Poland, Spain, Portugal and Cyprus. It is conceivable that a retroactive introduction will take place in these countries, as they would otherwise face infringement proceedings. Outside the EU, the United Kingdom, Australia, Canada, Japan and South Korea, for example, are also planning to implement minimum taxation by 2024. Singapore and Hong Kong, on the other hand, have announced that they do not intend to introduce minimum taxation rules until 2025. The USA is still not planning to adopt the OECD/G20 guidelines. Countries such as China, Brazil and India also currently have no plans to implement minimum taxation.
WHY IS THE FEDERAL COUNCIL IMPLEMENTING THE REFORM AT THE BEGINNING OF 2024?
The Federal Council argues that swift implementation would prevent the outflow of tax revenue from Switzerland to other countries and create stable framework conditions for the economy. If Switzerland were to forego the introduction of minimum taxation, Swiss subsidiaries of corporate groups from these countries would be taxed more heavily by their parent country, which would lead to an outflow of tax substrate abroad. The available data suggests that up to 50 percent of the profit tax base covered by the supplementary tax would have flowed abroad in 2024 if Switzerland had not introduced it.
WHAT ARE THE REACTIONS TO THIS?
The business umbrella organization Economiesuisse describes the introduction of the tax at the beginning of 2024 as "risky" because many countries are not yet on board. Compared to countries without a minimum tax, this is a disadvantage for Switzerland and its companies. At the same time, Switzerland's other location costs, such as the strong franc, high wages and real estate prices, remain significantly more expensive than abroad. The business location is coming under increasing pressure.
WHAT IS STILL OUTSTANDING?
The Federal Council will decide on the introduction of further elements of the reform by the end of 2024. For example, Switzerland will not yet make use of the new taxation rights from the beginning of 2024 if a group of companies operating in Switzerland does not reach the minimum taxation level abroad. Subsidiaries of Swiss corporate groups abroad can therefore continue to benefit from lower taxation if they are located in countries that do not (yet) implement minimum taxation. However, not ensuring minimum taxation abroad creates an incentive for Swiss corporate groups to relocate profits and activities to low-taxed foreign subsidiaries. The Federal Council will monitor further international developments and decide on the introduction of the international supplementary tax at a later date.
WAS PLANEN OECD/G20 SONST NOCH?
The OECD/G20 tax reform also includes another pillar. This provides for the world's hundred largest companies to be taxed in future not only in their country of domicile, but also where their services are consumed. According to the Federal Administration, between three and five Swiss companies are affected by this - including the chemical companies Novartis and Roche as well as the food giant Nestlé. This first pillar is to be implemented with a multilateral agreement, as announced by the State Secretariat for International Financial Matters (SIF) in the summer. Switzerland actively participated in the development and negotiations of all measures.
©Keystone/SDA
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