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Executive summary
With the approval in Switzerland of a constitutional amendment1 in a public vote on 18 June 2023, a majority (78.5%) of Swiss elective citizens as well as all 26 Cantons (result of the popular vote per Canton) cleared the way for the introduction of Pillar One and Pillar Two rules of the OECD/G20 Base Erosion and Profit Shifting (BEPS) 2.0 Project into Swiss domestic law. The constitutional amendment provides the legal basis for the implementation and the competence for the Swiss Parliament to introduce Pillar One and Pillar Two taxes in federal tax bills if deemed adequate. Due to the ambitious timeline set forth by the OECD, the constitutional amendment also contains a transitional provision for Pillar Two that gives authority to the Swiss Federal Council to introduce the Pillar Two rules by way of an ordinance until the Swiss Parliament enacts a federal tax bill.
Detailed discussion
Key elements of the constitutional amendment
The constitutional amendment creates the legal basis to introduce new federal taxes for large multinational enterprises (MNEs) to achieve taxation in market jurisdictions (Pillar One) as well as minimum taxation (Pillar Two) if deemed adequate. The approval of the public vote and the respective amendment of the Swiss Constitution do not have an immediate effect on the implementation and enactment of Pillar One or Pillar Two in Switzerland.
Key elements of the constitutional amendment include:
- Due to the urgency of the implementation resulting from the ambitious timeline set forth by the OECD, the Constitution includes a transitional provision that gives the Swiss Federal Council authority to implement Pillar Two in a first step by way of an ordinance until the permanent tax bill is enacted.
- Most principles in the transitional provision replicate the basic principles of the Pillar Two Model Rules, including the scope (MNEs with a consolidated annual turnover of more than EUR 750m), the minimum tax rate (15%), the calculation of the effective tax rate, and the consequences if the effective tax rate in Switzerland stays below the 15% minimum tax rate (levying of a top-up tax in the amount of the difference by way of the IIR, the UTPR and a domestic top-up tax likely in form of a QDMTT).
- The transitional provision contains a paragraph that stipulates that the Swiss Federal Council may deviate from the above principles if deemed necessary. This provides the flexibility needed for the Swiss Federal Council to still react to developments at the OECD level and in other jurisdictions and to implement Pillar Two in the best interest of Switzerland.
- The Federation receives 25% of the additional proceeds resulting from Pillar Two taxes, and the Cantons are entitled to 75%. The transitional provision regulates the basic allocation of the top-up tax revenue between Cantons. The income from the QDMTT is allocated to the Canton of the Constituent Entity causing the under-taxation in Switzerland. The income from the IIR and UTPR is allocated to the Canton of the top Constituent Entity in Switzerland.
- The Swiss Federal Council must provide the Swiss Parliament with a draft permanent tax bill for the implementation of Pillar Two through the ordinary legislative procedure within six years after the transitional introduction of the Pillar Two rules by ordinance.
Transitional implementation of Pillar Two by ordinance
Parallel to the constitutional amendment, the Swiss Federal Council had already released drafts of the transitional ordinance on Pillar Two for public consultation:
- A first draft of the ordinance focuses on the technical aspects with direct references to the Pillar Two Model Rules and only limited additional Swiss regulations. The Swiss specific articles govern the attribution of additional income of the Pillar Two taxes within Switzerland. The public consultation on the first draft ended on 17 November 2022.2
- The second draft of the ordinance focuses on the procedural aspects of the Swiss Pillar Two implementation. It was published on 24 May 2023 and the public consultation period continues until 14 September 2023.3
Outlook
With the public vote, Switzerland amended the Constitution and created the legal basis for the Swiss Parliament to work on federal tax bills to implement Pillar One and Pillar Two. There are currently no concrete implementation plans for Pillar One. Regarding Pillar Two, the Swiss Federal Council plans to make use of the transitional provision to implement Pillar Two by way of an ordinance for up to six years. With the second public consultation on the draft ordinance continuing until 14 September 2023, the Swiss Federal Council will likely issue the transitional Pillar Two ordinance in the last quarter of 2023. The ordinance will formally implement Pillar Two in Switzerland.
According to the draft ordinance and the relating commentary, the Swiss Federal Council expects the IIR and QDMTT to enter into force on 1 January 2024 whereas no final decision has been taken yet regarding the implementation of the UTPR (deferred to at least 1 January 2025).
The Swiss Federal Council has the possibility to quickly adjust its ordinance (e.g., to react to any unintended effects or problems that occur in practice or to make changes to improve the attractiveness of Switzerland as a business location). Such updates are not subject to Parliamentarian approval or a public consultation.
The timeframe of up to six years to prepare the permanent tax bill will allow those who draft the bill to draw on experience with the regulation based on the ordinance and will lead to a law already proven over multiple tax periods.
Ernst & Young Ltd, Zurich
- Daniel Gentsch
- Thomas Semadeni
- Alain Horat
Ernst & Young Ltd, Geneva
- Ioseb Nutsubidze
- Sarah Drye
Ernst & Young LLP (United States), Swiss Tax Desk, New York
- Stefan Ruest
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
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