Tax policy in transition: Switzerland in the context of global tax trends

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• The global corporate tax (BEPS) will not achieve a level tax playing field between countries, as major economic powers have spoken out against the project.
• The introduction of BEPS will reduce tax competition, but subsidy competition will become more important.
• Countries have a continuing need for more tax base. The trend towards increased international tax regulation will therefore continue.
• In Switzerland, value added tax will be increased further.

Zurich, 15 July 2024 - The audit and advisory firm EY Switzerland today published a comprehensive paper on current tax issues in Switzerland. Among other things, the experts focus on the implementation of BEPS 2.0 (Pillar Two) and the consequences for Switzerland. They explain why the "level playing field" will not be achieved and why the targeted global "tax harmonization" will lead to increased competition between locations in terms of subsidies. The experts also explain why the trend towards ever more international tax regulation is continuing. The paper also discusses VAT in Switzerland, where further increases are to be expected for various reasons - not least because of the voters' approval of the 13th AHV pension.

In addition to a brief review of the most important developments of the recent past, the paper published today contains the following theses on the topic of "Taxes":

Thesis 1: "Pillar Two" will not achieve the desired level playing field in terms of tax.

There is currently a great deal of fragmentation in the actual implementation and realization of the Pillar Two regulations, with some large, economically strong countries refusing to participate. According to the current "EY Pillar Two Developments Tracker", 27 countries have enacted final Pillar Two legislation. Draft legislation is available in 13 countries and 11 other countries have indicated their intention to implement Pillar Two. However, economic powers such as the USA, China, India and Brazil are among the countries that have spoken out against its introduction.

The way the Pillar Two rules work, due to the fragmented environment, means that multinational companies headquartered in one of the implementing countries are now taxed at a rate of 15% or more across the world. However, multinational companies headquartered in a non-implementing country (e.g. the USA or China) can continue to benefit from tax rates below 15%, depending on the group structure.

For this reason, the Undertaxed Profits Rule (UTPR) was introduced, which is applied on a subsidiary basis. This makes it possible to tax the under-taxed tax substrate of group companies - for example in the state of the parent company or in the state of the sister company - and to raise the taxation level in the group structure to at least 15%, even from below towards the top or laterally. "Although the EU member states have decided to introduce the UTPR by 2025, there are still major question marks over its introduction and application. Major pressure against the regulation is coming from the USA, which has already announced countermeasures should a state apply the UTPR to US companies," says Roger Krapf, Managing Partner Tax & Legal at EY in Switzerland.

In addition to the justified doubts as to whether tax harmonization can actually be introduced across all countries, there is the development that other factors determine the competition between locations: Although tax incentives largely lose their effect under the Pillar Two rules, subsidies continue to be fully effective. As a result, the existing shift from tax competition to subsidy competition is continuing. Since the beginning of 2023, the USA has granted USD 539 billion and the EU USD 571 billion in subsidies for a wide range of areas.

Thesis 2: The trend towards more and more international tax regulation is due to the increased need of many countries for more tax substrate and will continue.

The original BEPS project followed the financial crisis, which was accompanied by a slump in tax revenues. Despite overcoming this crisis and an economic recovery, there are many challenges that will continue to result in an increased need for additional tax revenue in the future. Events such as the war in Ukraine and the escalation in the Middle East have highlighted the multipolarity of the world and led to a strategic rethink, particularly in European countries, with an increased need for defense spending and a heightened awareness of security of supply. In addition, the economy is not unaffected by such developments, as uncertainty and protectionism are slowing down trade and growth, resulting in falling tax revenues, among other things.

In Switzerland, the VAT rate will continue to rise

Switzerland is also facing the aforementioned challenges and the pressure to increase tax revenue is increasing. Specifically, it can be assumed that this will primarily affect the VAT rate. There are also factors specific to Switzerland that are exerting pressure on the generation of additional revenue at federal level. Roger Krapf says: "The Swiss electorate expressed itself clearly in the last referendums with a Yes to a 13th AHV pension and a No to raising the retirement age. The constantly rising costs of the healthcare system also make additional state expenditure likely, as the recent vote on the premium relief initiative and the cost brake initiative show, despite their rejection."

As it is not foreseeable where the federal government will be able to make savings, it is likely that revenue will be increased in some way. The focus here is on VAT and direct federal tax, consisting of income and profit tax. However, an increase in direct federal tax - like an increase in VAT - would require a constitutional amendment, which would have to be approved by the electorate and the cantons. However, according to EY experts, an increase in VAT is more likely as, in contrast to direct federal tax, there are already a number of precedents for an increase combined with earmarking of the revenue generated.

Thesis 3: The administrative and compliance costs for both authorities and companies will continue to rise.

The EU regulations in various areas (CbCR, Public CbCR and MDR (DAC 6)), which can be traced back to the original BEPS project, mean considerable additional administrative work for the companies concerned. This also applies indirectly to Swiss companies as soon as they are active in the EU.

For example, country-by-country reporting comprises a large number of data points that must be collected, processed and listed in the report for each business unit. The turnover, pre-tax profit, profit tax paid, accrued profit tax, capital, profit carried forward and number of employees must be reported for each business unit. In addition, further information such as the main activity of each business unit must be provided and all data sources must be indexed. This is a very time-consuming undertaking for large corporate groups with many business units. Furthermore, the additional effort for the tax authorities should not be underestimated. The EU's Mandatory Disclosure Regime (MDR (DAC 6)) has also led to a considerable increase in administrative and compliance costs.

Last but not least, the aforementioned minimum tax itself sets new standards in terms of complexity. For example, more than 150 data points per business unit are required to comply with the GloBE rules. In addition, Pillar Two leads to far-reaching changes in the accounting and reporting processes, although this data is not currently available automatically. "These projects have led and continue to lead to an increase in administration and compliance costs. There is no end in sight to this development and we assume that this trend will continue," says Krapf, and he is not alone: "According to the EY Tax and Finance Operations Survey of 2022, 59% of CFOs and tax executives expect compliance costs to continue to rise."

Affected companies have no choice but to closely monitor current and future legislative developments, both internationally and nationally, and implement the relevant rules. In addition, care must also be taken to ensure that new compliance processes are introduced as efficiently as possible. "Accordingly, these administration and compliance processes are increasingly becoming a competitive factor for companies and a location factor for countries. Switzerland should continue to build on its strengths in this area," says Roger Krapf.

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