Introduction
The Pillar II initiative adapts the taxation of large groups to appropriately consider digitalisation and globalisation. With Pillar II (i.e. GloBE rules), a new global tax system is implemented, triggering a minimum corporate income tax rate of 15%. Given that in some cantons in Switzerland the corporate income tax on profits amounts to 12–15%, Swiss companies need to closely consider Pillar II. In a vote on 18 June 2023, the Swiss population passed the amendment of the Federal Constitution, which allows the introduction of the Pillar II system into federal law.
Fundamentals
The foundation for any top-up tax at country level is based on aggregated figures of all national business units. The calculation of the relevant profit must be carried out in accordance with an accepted accounting standard – i.e. in Switzerland IFRS, US GAAP or Swiss GAAP FER. On the other hand, the foundation for the Swiss corporate income tax is the statutory financial statements prepared based on the Swiss commercial law, which cannot serve as a basis for the GloBE calculation. In consequence, each business unit must prepare financial statements in accordance with an accepted accounting standard, even to be in the position to identify whether a tax-up tax may be the result. Transitioning from the Swiss statutory accounts to an accepted accounting standard is a cumbersome exercise.
In Switzerland, the implementation of Pillar II is currently ongoing. The minimum taxation ordinance will finally become effective as of 1 January 2024. Corresponding regulations have already been published as a draft and should be enacted in autumn 2023. In general, these regulations will refer to the GloBE rules. However, unlike other taxes in Switzerland, the top-up tax is not tax deductible.
Basic issue
Given that the GloBE rules are not based on the statutory financial statements applicable for Swiss tax purposes, certain divergences in the tax basis can occur. For instance, according to GloBE rules, income from non-controlling interests (e.g. participation of less than 10% with a holding period of less than one year) is part of the defined profit as per the default rule. On the other hand, for Swiss tax purposes, dividends from a participation with a minimum fair market value of CHF 1 mil. are subject to the participation exemption, regardless of the holding period. Moreover, for qualifying participations (i.e. participation more than 10%), any revaluation gains or losses are not part of the defined profit according to the GloBE rules, as opposed to the Swiss tax practice, where revaluation gains or losses are tax effective under certain conditions.
Procedural level
The cantonal tax authorities, where the top domestic business unit is located, is in charge of the assessment procedure. Any procedure will be carried out electronically. Regarding the procedural law as well as the criminal tax law, the corporate income tax rules apply mutatis mutandis also for the top-up tax. Any non-compliance can lead to a fine or, in the event of tax evasion, to a multiplication of the tax amount.
Summary
To summarise, the differences between the Swiss commercial law and the GloBE rules should not be underestimated. Multinational companies should therefore analyse at an early stage whether and to what extent they are affected by Pillar II. Currently, it cannot be said to what extent a top-up tax is levied for an average Swiss business unit. Even if the corporate income tax rate is below 15% in many cantons, business units are also faced with non-recoverable foreign withholding taxes, which also qualify as relevant tax expenses under the GloBE rules.
