December 16, 2022
Swiss Parliament approves domestic BEPS 2.0 Pillar Two implementation | Constitutional amendment now subject to public vote
On 16 December 2022, the Swiss Parliament approved the constitutional amendment to implement the Pillar Two rules of the Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting 2.0 project (BEPS 2.0) into Swiss domestic law (to view and download the amendment, click on this link). The amendment was approved by the National Council with 127 votes in favor and 59 against with 10 abstentions and by the Council of States with 38 votes in favor, and 2 against with 4 abstentions.
Consequently, Switzerland can introduce the Global Anti-Base Erosion Model (GloBE) Rules, including a Qualified Domestic Minimum Top-up Tax (QDMTT), an Income Inclusion Rule (IIR) and an Undertaxed Payments Rule (UTPR), in line with the GloBE Model Rules as published by the OECD.
Except for minor items, the draft constitutional amendment submitted to the Parliament by the Federal Council remained unchanged. For more information on the content of the constitutional amendment, see EY Global Tax Alert, Swiss Federal Council releases dispatch on constitutional amendment for BEPS 2.0 implementation in Switzerland, dated 24 June 2022.
As a result of the legal procedure, this amendment is now subject to a public vote on 18 June 2023, where a majority of the elective citizens as well as a majority of the Cantons (result of the popular vote per Canton) must approve the change to the Constitution. If the constitutional amendment is approved by the public vote, Switzerland would be able to legally implement the Pillar Two rules as of 1 January 2024.
Swiss Pillar Two implementation process
Switzerland decided to introduce Pillar Two in a three-step approach to ensure timely implementation.
In a first step, the legal basis for the implementation of the GloBE Model rules is established in the Constitution. Based on this newly created federal competence for an additional tax, Pillar Two can be implemented into a Federal Act by the Parliament.
Due to the ambitious timeline set forth by the OCED, the constitutional amendment also introduces a special transitional provision, enabling the Federal Council to implement Pillar Two by way of temporary ordinances in a second step. On 17 August 2022, the Federal Council opened a public consultation on the ordinance that will temporarily regulate the material aspects of the implementation. For more information on this first draft ordinance, see EY Global Tax Alert, Switzerland opens public consultation on material aspects of the OECD's Pillar Two minimum corporate tax, dated 18 August 2022.
In a third step, a Federal Act on Pillar Two is to be enacted under the ordinary legislative procedure. The constitutional amendment thereby foresees a mandate to the Federal Council to provide the Parliament with draft legislation for the implementation of Pillar Two by Federal Act within six years after the introduction of the Pillar Two rules by temporary ordinances.
The first deviation from the original draft constitutional amendment concerns the non-deductibility of the top-up taxes as expenses for Corporate Income Tax (CIT) purposes, as proposed by the Federal Council. In Switzerland, CIT is generally deductible as expenses for CIT purposes. The Parliament has now provided more flexibility to maintain this deductibility as well as with regard to top-up taxes. The decision of the potential (non-)deductibility should be made specifically for each type of top-up tax, at a later point in time and at the discretion of the Federal Council.
In addition, the Parliament introduced a new paragraph mandating the Federal Council to provide the Parliament with draft legislation for the implementation of Pillar Two by Federal Act, within six years after it chooses to introduce the Pillar Two rules by temporary ordinances.
Two amendments by the National Council were finally dropped after multiple discussions in both parliamentarian Chambers. One item concerned the distribution of the additional top-up tax revenue between the Federation and the Cantons. The two parliamentarian Chambers finally agreed on a 75%-25% split between the Cantons and the Federation, as originally proposed in the draft constitutional amendment, which is deemed to be the most business-friendly option among those debated. The second item — which was dropped from the voted constitutional amendment — concerned the question of whether the constitution should have mandated the Cantons to distribute the additional top-up tax income within its municipalities in accordance with the current CIT distribution.
To view and download the wording of the Constitutional Amendment subject to public vote, click on this link.
On 18 June 2023, the constitutional amendment will be subject to a mandatory public vote. If the majority of the Swiss citizens and the cantons approve the amendment, it is currently intended that the Federal Council will implement Pillar Two via temporary ordinances as of 1 January 2024. Whether potential delays with respect to the implementation of the Pillar Two rules in other jurisdictions will impact the implementation date has not been explicitly answered so far. Neither the draft ordinance, nor the commentary to the draft ordinance referred to this issue. However, according to the Federal Council, international developments will be considered at the time of the final decision regarding the date of entry into force of the ordinances in Switzerland.
The ordinance includes a QDMTT as well as an IIR and a UTPR in line with the GloBE Model Rules. The draft wording of the ordinance mainly refers to the GloBE Model Rules for the determination of the respective taxes and includes only very limited additional Swiss regulations. The Swiss Federal Council is expected to publish a second ordinance regulating the procedural aspects. A public consultation for that second ordinance is expected after the OECD releases its Agreed Administrative Guidance.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Ltd, Zurich
Ernst & Young Ltd, Geneva
Ernst & Young Ltd, Zug
Ernst & Young Ltd, St. Gallen
Ernst & Young LLP (United States), Swiss Tax Desk