OECD minimum tax rate: the ball is now in the authorities’ court
Almost 80% of the Swiss electorate voted “yes” to the OECD minimum tax rate. They were quite right to do so, but careful implementation is now called for. In certain aspects, the new OECD rules are not entirely compatible with Swiss tax law as it stands. There are unforeseen pitfalls in relation to holdings – we are, after all, talking about large corporate groups. The authorities must therefore get to work straight away.
You might think that the new minimum tax rate of 15% seems innocuous enough at first glance and ask yourself, “The tax rate on corporate profits is going to be at least 15%. What’s the problem?” As is so often the case, however, the devil is in the detail. It turns out that there is more than one way to calculate 15%. The new OECD tax rules, which Switzerland is set to adopt, differ significantly from the current Swiss law on corporation tax in a number of respects. As a result, the way taxable income is calculated under the OECD system is not at all comparable to the way it is calculated under Swiss law. For example, the Swiss legal framework is set out in the Code of Obligations, which is deliberately conservative and circumspect. To calculate the minimum tax, however, Switzerland must apply international accounting standards such as IFRS rather than the Code of Obligations. The problem is that these standards were developed for investors and stock exchanges, not for tax purposes, so they are often much less conservative and circumspect. The resulting taxable income figures thus tend to show more pronounced fluctuation from year to year than those under the Code of Obligations and can consequently be a lot higher than the latter. Moreover, the OECD has introduced numerous rules that run counter to current Swiss law.
A calculation example to illustrate the point
The normal tax rate on the profits of a group of companies based in Zurich is 19% – that is already four percentage points above the minimum of 15% required by the OECD. The group posts a profit of 1,000 but has to book a write-down of 500 on a holding that has lost value. Under Swiss law, this reduces its taxable income to 500, resulting in a tax bill of 95 (19% of 500). Under the OECD rules, however, the full profit of 1,000 must be taxed despite the write-down. This means that the group falls below the OECD’s 15% minimum rate (15% of 1,000 = 150), so it has to pay an additional 55 (i.e. 150 – 95) to reach the minimum rate. If the value of the holding in question goes back up in the future, this will result in a revaluation in the group’s accounts. Under Swiss law, this means that the full profit must then be taxed, so a further 95 (19% of 500) in tax is payable. The end result is that the revaluation increases the tax burden by 95, but the write-down does not reduce it by 95. In fact, it increases the tax burden by a further 55, meaning that the overall cost of the value fluctuation comes to 150, despite the fact that the group has not earned a single cent more.
What is wrong here?
Even though the tax rate in Zurich, at 19%, remains comfortably above the OECD minimum of 15%, the group has to pay an extra 150 in tax due to the simultaneous application of two different systems, namely Swiss tax law and the OECD rules.
New rules designed to impose a minimum tax rate of 15% simply cannot be allowed to lead to additional taxes in a jurisdiction where the tax rate is already above 15% (19% in the case of Zurich). This is certainly not in the spirit of the new provisions in the Federal Constitution that we voted on.
What needs to be done?
The above example merely represents one of many possible scenarios and shows how Swiss tax law and the OECD rules are not yet compatible with each other. It is not just Zurich that is affected, all cantons are. The ball is now in the authorities’ court. Until the Swiss rules are aligned with those of the OECD, Swiss taxation practices need to be made more flexible – in the case of holdings, for example, to ensure that the fiscal effects of write-downs and revaluations from year to year can be planned for and cushioned. The authorities not only have the power to do so, they have a duty.