Update on OECD's Pillar two: Global Minimum Tax in Switzerland

New Administrative Guidance on Article 9.1. of the Pillar Two Model Rule

What has been announced?

• On January 15, the OECD published new Administrative Guidance ("AG") that will impact the Pillar Two position of several Swiss entities of multinational enterprises (MNE group).
• The AG is related to article 9.1. of the OECD Model Rules that deals with transition rules that allow pre-GloBE deferred taxes arising from temporary differences and carryforwards to be considered for the GloBE regime. Article 9.1.2 of these transition rule does exclude deferred taxes for the Pillar 2 calculation if such deferred taxes resulted from DTA's that were generated in a transaction that took place after November 30, 2021.
• The Administrative Guidance provides additional and new guidance on the elements that must be met for Article 9.1.2 to apply and states that the term “transaction” shall be interpreted more broadly than previously defined and includes any agreement, ruling, decree, grant or similar arrangement with a general government, as well as any amendment or modification to a pre-existing governmental arrangement.

What is the purpose of the Administrative Guidance?

• The OECD wants to prevent the situation where article 9.1. is used to shelter all or a portion of an MNE group’s future low-taxed income from the GloBE Rules by using certain DTAs relating to tax credits or basis step-ups.

Who is impacted by the Administrative Guidance?

• Companies with a deferred tax asset (DTA) in their books that are attributable to a governmental arrangement fall within the scope of Article 9.1.2 where the arrangement provides the taxpayer with a specific entitlement to a tax credit or other tax relief (e.g., a tax basis step-up) that does not arise independently of the arrangement.
• Companies with deferred tax assets relating to tax credits or basis step-ups agreed with or granted by a government after 30 November 2021.

How does the Administrative Guidance work?

• The Administrative Guidance provides for a two-year grace period that allows Swiss entities to use deferred tax expenses coming from such DTAs for FYs 2024 and 2025.
• However, the Administrative Guidance allows only 20% of the amount of deferred tax assets that were originally recorded to be used. In addition, the grace period is not applicable if the DTA results from an arrangement concluded after 18 November 2024.

What is our current understanding about the impact on the financial statements

• Since the Administrative Guidance was released after 31 December 2024, it is unclear how it needs to be reflected in the 2024 financial statements. There are no clear guidelines if a potential impact has to be accounted for in the accounts for 2024 or whether referencing in the notes is sufficient.

What you need to do

• Swiss entities that have recognized DTAs within the scope of Article 9.1.2 should analyze the extent to which they are affected by the Administrative Guidance.
• Please reach out to us with any questions or if you would like further clarification on how your company is impacted by the Administrative Guidance.

Example

How the Administrative Guidance may impact your current taxes

Company A discussed and agreed with its cantonal tax authority that a tax holiday granted up to 2033 was converted in autumn 2023 into a non refundable tax credit of 1,000. A DTA of 1,000 was accrued in Company A's group financials as of 31 December 2023.

Going forward, Company A records a deferred tax expense of 100 in its financial accounts associated with the reversal of the deferred tax asset (DTA) each year from 2024 to 2033. See table below:

 

The pretax profit (loss) and the Simplified Covered Taxes of Company A are as follows:

 

Under paragraphs 8.8 and 8.9 of the Commentary to Article 9.1.2, the Grace Period is the 2024 and 2025 Fiscal Years, and the Grace Period Limitation is 20% of the amount of the deferred tax assets that were originally recorded. Thus, the grace period limitation in our example is 200.

The pretax profit (loss) as well as the Simplified Covered Taxes of Company A excluding deferred tax expenses attributable to the reversal of deferred tax assets and liabilities described in paragraph 8.5 are as follows:

The grace period will have ended for the 2026 fiscal year. The 100 of deferred tax expense recorded in 2026 is excluded from the Simplified Covered Taxes calculation and, as a result, the MNE group is not eligible for the Transitional CbCR Safe Harbour in the 2026 tested Fiscal Year. Accordingly, its Transition Year in respect of that jurisdiction is 2026 and the deferred tax expense of 100 is also excluded from the Total Deferred Tax Adjustment Amount under Article 4.4.