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The OECD/G20 BEPS 2.0 Project – A Two-Pillar approach
The OECD/G20 Inclusive Framework reached a high-level consensus on implementing new profit allocation and nexus rules for market jurisdictions (Pillar 1) and a new global minimum tax of 15% (Pillar 2) in 2021. This BEPS 2.0 project will radically reform the international tax landscape. While the work on Pillar 1 is still ongoing at the level of the OECD, Pillar 2 has been implemented at least in part in several jurisdictions around the world, including Switzerland. EY will support you in implementing the requirements of the BEPS 2.0 Project.
The BEPS 2.0 project
The continued work of the OECD/G20 on Action 1 - addressing the tax challenges arising from the digitalization of the economy - of the original Base Erosion and Profit Shifting (BEPS) Project resulted in a two-pillar approach known as BEPS 2.0. However, the BEPS 2.0 Project evolved far past the digitalized economy and now affects all large multinational enterprises (MNE). More than 138 of the 145 Inclusive Framework member countries have reached a consensus on BEPS 2.0, which will dramatically change the international tax system. The Inclusive Framework on BEPS allows interested countries and jurisdictions to work with the OECD and G20 members on developing, implementing and monitoring BEPS related standards.
Pillar 1 – Reallocation of taxing rights
Pillar 1 comprises an Amount A and an Amount B. Amount A will lead to a reallocation of taxing rights with new profit allocation and nexus rules for market jurisdictions and applies to companies with global revenues of more than EUR 20bn and a profitability of more than 10%. It is planned to be applicable if a critical mass of countries sign an Amount A Multilateral Convention (MLC). Amount B, on the other hand, relates to a simplified arm’s length principle for baseline marketing and distribution activities and should be incorporated into the OECD Transfer Pricing Guidelines. Unlike Amount A of Pillar 1 and the global minimum tax rules under Pillar 2, there are no monetary thresholds for MNE groups to be within the scope of Amount B.
Pillar 2 – The 15% Global Minimum Tax
On 20 December 2021, the OECD published the Global anti-Base Erosion (GloBE) Model Rules on Pillar 2, which are now implemented into the domestic tax laws of various jurisdictions around the world. They apply to MNE groups with a turnover over EUR 750m and are designed to ensure a 15% minimum tax rate in each jurisdiction. This is achieved by applying a top-up tax in the case of undertaxed income in foreign jurisdictions. This top-up tax can be levied by foreign jurisdictions via two charging mechanisms: either by applying a top-up tax on the parent company level – through the Income Inclusion Rule (IIR), or on the subsidiary level by applying the Undertaxed Payments Rule (UTPR). There is also a third mechanism, the Qualified Domestic Minimum Top-up Tax (QDMTT), which is designed according to the Model Rules and allows a jurisdiction to increase the tax burden of domestic in-scope companies to 15%, and therefore avoid the foreign levying of top-up taxes. To uniformly determine and compare the effective tax rate (GloBE ETR) of in-scope MNEs for each jurisdiction, the GloBE Model Rules also create a new tax basis (GloBE Income) and define the Covered Taxes.
Several jurisdictions around the world have implemented at least parts of Pillar 2 for fiscal years starting on or after 31 December 2023/1 January 2024. Among them are, for example, Australia, Canada, most EU Member States, the UK and Switzerland. However, there are currently notable exceptions such as the US, China and India, who all have not introduced Pillar 2 so far. Thus, the global Pillar 2 landscape remains fragmented.
EY position paper on "BEPS 2.0 and value-added tax"
Key propositions we will explore:
- The hoped-for level playing field of BEPS 2.0 will not be achieved and the global “tax harmonization” sought will increase subsidy competition between locations.
- The trend toward ever more international tax regulation is not about to stop.
- The paper also discusses VAT in Switzerland, where further increases are to be expected for various reasons.
Download recommendations for action
Several jurisdictions around the world have implemented at least parts of Pillar 2 for fiscal years starting on or after 31 December 2023/1 January 2024. Among them are, for example, Australia, Canada, most EU Member States, the UK and Switzerland. However, there are currently notable exceptions such as the US, China and India, who all have not introduced Pillar 2 so far. Thus, the global Pillar 2 landscape remains fragmented.
Key Elements of the Swiss Pillar 2 Implementation
Due to the tight timeline set forth by the OECD/G20, Switzerland decided to implement Pillar 2 by way of a transitional ordinance which is based on a constitutional amendment approved by the Swiss elective citizens in a public vote on 18 June 2023. At a later point in time the Swiss Parliament will enact a Federal Pillar 2 Act.
As a result of uncertainty in relation to the adoption of Pillar 2, the Federal Council decided to introduce only a QDMTT in Switzerland through a transitional ordinance which entered into force on 1 January 2024. While the ordinance comprises the regulations for an IIR and UTPR application, the Federal Council will revisit the entry into force of these mechanisms at a later point in time. With the implementation of the QDMTT, Switzerland ensures that it will not forgo any tax revenues to foreign jurisdictions while remaining flexible in light of any future global Pillar 2 developments as regards the IIR and UTPR mechanisms.
The additional tax collected from the application of the QDMTT will be split between the cantons (75%) and the federation (25%). The additional revenues generated after any additional required payments in the national fiscal equalization scheme will be reinvested in measures to consolidate the attractiveness of Switzerland as a business location.
Next steps
With the first GloBE Information Return (GIR, the internationally standardized Pillar 2 tax return) due 18 months after the end of the first fiscal year of being in-scope of the GloBE rules (the return deadline is 15 months the following fiscal years), affected companies must respond now and move from the readiness phase to the design phase of their internal Pillar 2 implementation (from the first to the second phase of the implementation life cycle depicted in the graphic below). Generally, all in-scope MNEs should now – after the completion of the readiness phase – have an initial understanding on how the group structure impacts the tax calculation and collection mechanisms, have identified data gaps for the filing obligations related to Pillar 2 and maybe even have run a high-level provisioning and Transitional Safe Harbor exercise. Since Switzerland has not introduced an IIR, Swiss groups also need to understand where they have filing obligations and potential tax payment obligations. Moving into the design phase of the implementation life cycle requires detailed decisions to be made on the combination of people, process and technology which would provide the most efficient and effective solution to manage all reporting, compliance and planning activities on an ongoing basis.
How EY can help
EY supports you in staying ahead of these international tax law developments by recognizing the impact on your business model and helping you to take appropriate action. This includes considering the impact of the regulations when making M&A and investment decisions or when applying for tax incentives. From an operational perspective, we can help you with all aspects of the implementation life cycle (see graphic below) and would be happy to share our broad experience with implementation projects and the technology applications we have developed to support the provisioning and compliance process.
Insights
BEPS Pillar II – What are the impacts on M&A transactions?
Since the beginning of this century, developments in international tax policy have accelerated significantly. The latest is the introduction of the OECD/G20 BEPS Pillar II, which aims to address base erosion and profit shifting by introducing a global minimum tax. Going forward, this will radically change the landscape for tax structuring as well as for certain domestic and cross-border M&A transactions.