The tax world is currently undergoing significant and very rapid changes. The international community has now been working for years on the avoidance of base erosion and profit shifting initiative (BEPS initiative) and the suggested measures are beginning to be implemented throughout the world. As a result of the pressure put on Switzerland by the European Union and the OECD, Switzerland is now committed to abolishing the special tax regimes (namely, holding companies, principal or mixed companies as well as finance branch offices). This is the main focus of the upcoming Swiss Corporate Tax Reform III (CTR III).
Regional or global headquarters (IHQ) of foreign multinationals have typically been the main beneficiaries of such tax regimes and therefore will be the ones most affected by their abolishment. However, other international tax developments may also impact IHQ structures.
In such a shifting environment, International Headquarters’ tax professionals should have in mind the following 6 questions below:
1) Is it more beneficial to voluntarily renounce a tax privilege before it is abolished or is it better to wait until the last moment?
Every situation is different and a proper calculation / estimation of the specific case is a worthwhile exercise in order to assess whether renouncing a tax privilege makes sense before the implementation date of CTR III. This includes considering a possible step-up in the course of the switch, going from privileged to ordinary taxation.
Also bear in mind that from 2018 onwards, tax rulings will be exchanged spontaneously between tax authorities under certain conditions. The possible impact of such an exchange of information (in particular, regarding rulings for a certain profit allocation of a Swiss company to a permanent establishment abroad) should be carefully reviewed.
2) Will my IHQ be able to take advantage of new R&D or innovation incentives and notional interest deduction?
In the course of CTR III, Switzerland will probably introduce favorable regimes for R&D, innovation incentives and a patent box system. Your group may benefit from some of these measures once they are implemented in Switzerland. However, BEPS actions 8 – 10, a major rewrite of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, will pose a challenge to any of the surviving or new tax regimes. Note that any remaining tax shelters must demonstrate significant substance in order to actually survive being challenged by the OECD.
Another key element that might be introduced is a notional interest deduction. Swiss subsidiaries of foreign groups with high equity would benefit from this development, especially if they finance activities performed outside of Switzerland.
3) How will the new rules implemented by foreign countries impact my structure?
More and more countries are introducing rules that may have a direct impact on your Swiss operations. Such rules include minimum tax rate regulations on specific payments in order to deduct them (interest, royalties, etc.) as well as broader CFC rules. In addition, hybrid instruments used (such as hybrid loans or hybrid entities) may be affected by new rules which is why restructuring measures may be needed.
In any case, having the right people with the right function at the right place is crucial in the new tax world. Restructuring measures should be contemplated to mitigate foreign CFC rules.
4) From a transfer pricing perspective, are you ready and do you feel comfortable disclosing and arguing your positions?
Under BEPS Action 13, transfer pricing documentation will consist of three layers: a master file, a local file and a country-by-country file (CbCR).
As with all actions that aim for significant increase in transparency, Action 13 will have an immediate and major impact on business. CbCR not only provides tax authorities with details on the arm’s length character of the intercompany arrangements by means of transfer pricing documentation but also detailed quantitative information (key indices) on the operations in each country where your company is located. Beyond that, the new, enhanced content requirements of the master file and the local file will increase your compliance efforts.
As the CbCR and master files will be available in all relevant jurisdictions, consistent communication and presentation of your business will be a necessity.
5) Are you considering the impact the new rules may have on your indirect tax position?
The BEPS actions will also have a direct impact on the indirect tax positions (VAT and customs) of multinational and cross-border businesses, which is often overlooked by companies only concentrating on the effects of the new rules from a corporate income tax and transfer pricing point of view.
Such impact could be the result of potential re-qualification of the presence of a business in a given country (e.g. VAT implications from the new tests on a PE creation), a potential re-assessment of income attributable to different companies or group divisions (e.g. increased import values of goods), a potential restructuring of the supply chains in response to the new rules or changes to invoicing and supply chain documentation and reporting for VAT and customs purposes, etc.
Therefore, it is important to have an idea of how such indirect tax could impact your business as part of the overall assessment of the impact of BEPS on your business.
6) What is the timing of changes that could affect my structure?
The chart below depicts the timing of the implementation of CTR III, spontaneous exchange of rulings (SER) and CbCR:
(click graphic to enlarge)
Current international tax developments will have a significant impact on international headquarters in Switzerland. There is still some time to assess the implications on your specific case and identify any action needed. We are currently experiencing that various cantonal tax authorities are reaching out to groups to openly discuss their future plans and what CTR III could/will mean for them. That said, it is best to be prepared for such discussions and use the remaining time to perform a proper assessment. It is crucial to apply a holistic view, not forgetting to consider all possible changes and developments that could affect your structure. It is also a good moment to identify and benefit from the great planning opportunities the current changing tax world is creating. In view of this, your agenda for 2016 may look as follows:
- Perform model calculations for future tax impacts with regard to CTR III and decide on a future set-up;
- Analyze impact of spontaneous exchange of rulings and actions needed in this respect (i.e. gain overview of existing rulings and evaluate risks of spontaneous exchange of rulings);
- Prepare CbCR based on currently available figures and analyze possible risks in order to define possible transfer pricing/restructuring measures;
- Track the developments due to the introduction of new CFC rules in foreign countries, assess any implications on your structure and identify restructuring measures that could mitigate the impact.