Switzerland initiates public consultation on the implementation of BEPS 2.0 starting in 2024

Dominik Birrer
Partner Tax , PwC Switzerland

Etienne Michaud
Manager - Transfer Pricing and Value Chain Transformation, Geneva, PwC

Following the publication of the final OECD model rules on the 15% minimum tax for multinational enterprises (“MNEs”), also known as Pillar Two, the Federal Council initiated a public consultation on the implementation of BEPS 2.0 in Switzerland.

The draft constitutional amendment, published on 11 March, would grant the Federal Council authority to introduce a differentiated tax treatment for multinational companies falling within the scope of BEPS 2.0 by means of an ordinance. Small and medium-sized entities shall not be affected by this change. Interested parties have until 20 April 2022 to provide their comments on the proposed amendment, and Swiss citizens will be invited to vote on the proposed amendment of the Swiss Constitution likely in June 2023.

The draft constitutional amendment covers both Pillar One and Pillar Two of BEPS 2.0, with a particular focus on the implementation of Pillar Two in Switzerland by 1 January 2024. In its detailed explanatory report, the Federal Council outlines its strategy to maintain the competitiveness of Switzerland in the international arena while ensuring that any additional taxes levied on Swiss MNEs under Pillar Two rules remain in the country.

Some of the key implications of the proposed implementation of Pillar Two in Switzerland are provided below:

Pillar Two would generally apply to Swiss MNEs (or Swiss entities being part of a foreign MNE) with a consolidated turnover of EUR 750 million or more.

For in-scope Swiss MNEs or foreign MNEs with a presence in Switzerland, the new rules provide the following:
- the cantons (primarily the canton where the ultimate parent entity of the MNE is tax resident in Switzerland) shall assess and collect a supplementary federal tax on profits of foreign subsidiaries of Swiss headquartered groups, where those are taxed at an effective rate below 15% (= implementation of the so-called Qualified Income Inclusion Rule and Undertaxed Payment Rule in Switzerland); and
- the Swiss cantons shall assess and collect a supplementary federal tax on Swiss profits if those are taxed (at a country-level aggregate) below the 15% minimum effective rate (= implementation of the Qualified Domestic Minimum Top-up Tax). This aims to prevent those profits from being taxed abroad instead.

The determination of the effective tax rate of 15% is based on OECD model rules which include several important adjustments to both taxes (numerator) and profits (denominator). In some circumstances, groups with a Swiss effective tax rate of 15% or more based on current tax rules could still be subject to a supplementary federal tax.

Both the OECD model rules and the proposed Swiss implementation provide for a substance carve out. This will grant MNEs an additional deduction in the computation of the supplementary federal tax, based on a percentage of payroll expenses and tangible assets in the jurisdiction.

As a next step, it is anticipated that the Federal Council will open a public consultation on the proposed temporary federal ordinance in the coming months, which would come into force on 1 January 2024 subject to the popular vote.