This week in tax: Switzerland opens consultation on pillar two
This week Switzerland opens consultation on draft legislation to implement the OECD’s global minimum tax rate, while Germany cuts VAT amid the highest inflation rate in decades.
Switzerland is the latest country to issue draft legislation on pillar two, and sources say that companies should closely review the Swiss version as the changes will impact local taxes.
The Swiss Federal Council launched its consultation on the ordinance to adopt the OECD’s global anti-base erosion rules and qualified domestic minimum top-up tax on Wednesday, August 17.
The ordinance temporarily sets up local minimum taxation in Switzerland using a supplementary tax. The ordinance specifies the distribution of each canton's share of the tax. However, procedural regulations are still being developed and a consultation is due in coming months.
Swiss finance ministers say that the draft legislation is the safest option for Switzerland to stay competitive globally in case the rest of the world moves forward with pillar two.
It is important for large corporate taxpayers to scrutinise the Swiss legislation on pillar two because several companies could lose their local tax benefits under the incoming framework.
China and Switzerland are among those countries with local incentives that are sensitive to pillar two, and advisers suggest it might be costly to miss key legislative details in these jurisdictions over others.
The Swiss government indicated in its draft that the decision to bring its proposed regulations into force will depend on how far implementation has progressed in other countries.
One head of tax at an investment management company in Switzerland says if the global agreement to implement pillar two falls apart abroad, then Switzerland will probably not implement the minimum tax rules either.
So far, the misalignment between the US Inflation Reduction Act’s corporate alternative minimum tax and the OECD’s pillar two rules is the most important setback that could dissuade international lawmakers from adopting pillar two.
The last day to submit comments for the consultation is November 17. The Swiss Federal Council estimates that its version of pillar two rules will come into force by January 2024.
Germany to cut VAT on gas in bid to soften blow of high prices
The German government says it plans to cut VAT on gas sales by 12 percentage points from 19% to 7% as it tries to limit the impact of soaring energy prices on households.
The reduction announced on Thursday, August 18, will come into effect in October and is intended to offset the impact of an extra gas levy that’s also scheduled to start at the same time.
This additional levy, which is aimed at compensating energy suppliers for the surge in wholesale prices, will add 2.419 cents per kWh to consumer gas bills.
Chancellor Olaf Scholz’ government hopes that the cut to VAT will lower gas prices and alleviate the pressure of rising inflation.
Some businesses including the chemicals industry, one of the country’s largest gas consumers, have complained that they would not benefit from the relief as company’s don’t pay VAT, according to the Financial Times.
Germany has been particularly hard hit by the surge in energy prices following Russia’s invasion of Ukraine. This has resulted from Berlin’s heavy reliance of Russian gas, which accounted for 55% of overall gas imports before the war.
The German government suspended work on the Nord Stream 2 pipeline, and, in response, Vladimir Putin’s government reduced gas flows through the Nord Stream 1 pipeline to about 20% of capacity.
This has sent prices rocketing and driven inflation up to the highest level in almost 50 years. Wholesale European gas prices have jumped nine times higher than the average level of recent years to €225 ($227) per megawatt hour, according to the Financial Times.
German authorities have also set a target to reduce overall gas usage in the country by 20% this year to avoid rationing supplies for the industrial sector in the event of further supply cuts by Russia.
US boosts IRS budget to improve IT and enforcement
In other news, the Biden administration is about to give $80 billion to the Internal Revenue Service to enhance the tax authority’s enforcement processes and IT systems.
The Internal Revenue Service is getting $80 billion from the Inflation Reduction Act for tax enforcement, and sources say that the money will most likely increase audits on large taxpayers.
The IRS will have to hire and train thousands of additional revenue agents and support staff to do the audit work. The investment is projected to add $203.7 billion in tax revenue.
“Enforcement resources will focus on high-end noncompliance,” said one IRS division chief counsel at the tax administration in Washington DC.
“These resources will support a much-needed upgrade of technology that is decades out-of-date, and an investment in taxpayer service so that the IRS is finally able to communicate with taxpayers in an efficient, timely manner,” the counsel added.
The breakdown of the IRS’s financing includes $25 billion for operations, $5 billion for technology modernisation, and $45 billion for tax enforcement over 10 years.
The funding is estimated to cover costs for about 87,000 employees in a range of positions, including auditors, customer service, and IT workers. The IRS will share exact numbers in the coming months as its incoming financing is released in tranches.
IRS staff say the central management system needs serious changes. The service has a surplus of documents amid an increasingly digital global tax environment that demands intense data processing.
Top TP cases in 2022 so far
This week ITR reviewed the landmark court rulings of 2022 as corporations such as McDonald’s France, BlackRock, and Rio Tinto faced investigations into their transfer pricing arrangements.
Tax authorities have been increasingly tougher on tax avoidance, particularly as governments face the economic downturn of the COVID-19 pandemic and Russia’s invasion of Ukraine.
ITR looks into the top court rulings this year so far.
On June 16, the fast-food company agreed to pay €1.25 billion ($1.31 billion) to the French tax administration (‘le fisc’) – making it the second biggest tax settlement in French history.
The company allegedly dodged €469 million in tax through in TP arrangements in Luxembourg and Switzerland, as well as Delaware in the US.
The investigations, initiated by judge Eva Joly in 2015, looked into the company’s TP for the years 2009 to 2020. It found that the company had doubled its royalty fees in order to shift profit abroad and avoid paying all taxes.
The Upper Tribunal (UT) ruled against investment management company BlackRock, on July 19, confirming HM Revenue and Customs’ decision that denied the shareholder loan interest deductions involving $4 billion loans.
The dispute concerned the corporation’s inter-company loans as part of its acquisition of Barclays Global Investors. HMRC claimed the loans were non-compliant with the arm’s length, but the First-tier Tribunal (FTT) ruled in favour of BlackRock.
The UT’s decision in July yet overturned FTT’s ruling. HMRC will go through with its appeal after all.
Other headlines this week include:
Next week in ITR
ITR will be speaking to multinationals about how they are responding to the possibility of excise tax reform in the Gulf Cooperation Council (GCC) and the impact these changes would have on their businesses.
ITR will assess the latest developments in India’s TP regime, including the rise in dispute resolution methods from taxpayers and authorities, as well as the surge in TP audits. Tax directors based in India will also discuss the key changes needed in pillar one and two.
ITR will also cover a July ruling from the High Court of Justice of Catalonia as it could benefit large taxpayers by setting a precedent to allow dividends from a Brazilian company to a Spanish entity to receive a full tax exemption under the Brazil-Spain tax treaty.