The OECD/G20 BEPS 2.0 Project – A Two-Pillar approach

The BEPS 2.0 project

The continued work of the OECD/G20 on Action 1 of the original Base Erosion and Profit Shifting (BEPS) Project – addressing the Tax Challenges Arising from the Digitalisation of the Economy – resulted in a two-pillar approach. This two-pillar approach is better known as BEPS 2.0. However, the BEPS 2.0 project evolved far past the digitalized economy and now affects all large multinational enterprises. More than 135 of the 141 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). The project will be implemented in a very short term.

Pillar 1 will lead to a reallocation of taxing rights with a new profit allocation and nexus rules for marked jurisdictions and applies to companies with global revenues of more than EUR 20bn and a profitability of more than 10%. It was announced in October 2021 that a Multilateral Convention and model rules should be published in early 2022, with a signing ceremony taking place in mid-2022. The rules are planned to be applicable from 2023 if a critical mass of countries will sign the convention. The current draft model rules, which do not yet represent a consensus of the Inclusive Framework, have been released for public consultation, have been released for public consultation.

Pillar 2, on the other hand, applies to Multinational Enterprises (MNEs) with a turnover over EUR 750m and ensures a 15% global minimum tax rate. 

The new 15% Global Minimum Tax (Pillar 2)

On 20 December 2022, the OECD published the model rules on Pillar 2. These new rules ensure a 15% global minimum taxation in case of undertaxed income in foreign jurisdictions 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). They also create a new tax basis (GloBE Income) and define the Covered Taxes to uniformly determine and compare the effective tax rate (GloBE ETR) of in-scope MNEs for each jurisdiction.

The implementation timeline the OECD set forth is extremely ambitious. The Pillar 2 rules are intended to come into effect by 1 January 2023.

Due to this urgency, affected companies must respond now. This goes beyond impact assessment and a probable ETR increase. The new Pillar 2 rules significantly increase the compliance and reporting requirements. Therefore, the relevant data must be identified and the IT systems must be updated accordingly. All of this must be implemented by the end of 2022.

Key Elements of Swiss Implementation

Switzerland will implement the BEPS 2.0 Pillar 2 by introducing both the IIR, the UTPR and a domestic minimum top-up tax. This domestic minimum top-up tax will be applied to Swiss in-scope entities to ensure the 15% minimum taxation in Switzerland, to save these entities from foreign tax proceedings. Furthermore, Switzerland intends not to forgo any tax revenue to which it is entitled to. The additional tax proceedings are currently intended to remain with the cantons. However, this is subject to discussion an may change during the implementation process. They will also be in charge of using their fiscal policy leeway to decide on locational measures to ensure Switzerland’s continued attractiveness as a business location.

Due to the ambitions of the implementation timeline of the OECD, Switzerland plans to introduce this reform by a constitutional amendment, which will require a popular vote expected to take place in June 2023. The Federal Council will then issue a temporary ordinance to implement these rules as of 1 January 2024.