Understanding the concepts of qualified, acceptable and authorized accounting standards for Pillar Two purposes is no easy task, particularly in light of the diversity of international standards applied in Switzerland but also as the accounting standard relevant for domestic taxes is not an acceptable accounting standard for Pillar Two.
On 18 June 2023, the Swiss people voted in favor of implementing the global minimum tax framework (BEPS Pillar Two) agreed by the OECD/G20 Inclusive Framework.
In this blog series our experts are highlighting practical application issues Swiss MNE groups should think about in order to manage and optimize future top-up tax consequences.
In this blog we address the definitions of qualified, acceptable and authorized accounting standards in a Swiss context from a Pillar Two Model Rules (“MR”) and a safe harbor perspective while also taking into account the concept of material competitive distortion.
What do the GloBE Model Rules say?
Principally, the GloBE Rules apply to Constituent Entities (“CE”) that are members of an MNE Group that has an annual revenue of EUR 750 million or more in the Consolidated Financial Statements (“CFS”) of the Ultimate Parent Entity (UPE) in at least two of the four Fiscal Years immediately preceding the audited Fiscal Year.
Further, Financial Accounting Net Income or Loss i.e. the starting point to calculate GloBE Income is the net income or loss determined for a CE in preparing the CFS of the UPE.
So it’s clear that both the definition of the scope (Article 1.1.1) as well as the calculation mechanism in the MRs reference to the CFS and these are then also defined in Article 10 as:
c. where the UPE has financial statements described in paragraph (a) or (b) that are not prepared in accordance with an Acceptable Financial Accounting Standard, the financial statements are those that have been prepared subject to adjustments to prevent any Material Competitive Distortions; and
Paragraphs b. and d. of the definition relate to groups with permanent establishments and where deemed consolidation rules apply, which are separate topics and not the focus of this blog.
Material Competitive Distortion is defined as an aggregate variation greater than EUR 75 million in a Fiscal Year comparing the application of authorized (but not acceptable) accounting standard principles/procedures as compared to the amount that would have been determined by applying the corresponding IFRS principle/procedure.
What do the safe-harbor rules say?
The CbCR Safe Harbor rules introduced in December 2022 on the other hand refer to Qualified Financial Statements and defines these as:
b. separate financial statements of each Constituent Entity provided they are prepared in accordance with either an Acceptable Financial Accounting Standard or an Authorised Financial Accounting Standard if the information contained in such statements is maintained based on that accounting standard and it is reliable; or
And finally, the QDMTT safe harbor rule introduced in the July Administrative Guidance requires the QDMTT to be computed based on the UPE’s Financial Accounting Standard or, in certain circumstances, a Local Financial Accounting Standard (refer to our separate Blog in this regard).
How is this relevant for Swiss MNE Groups
The MR defines Swiss GAAP FER as an Acceptable Financial Accounting Standard. Swiss Code of Obligations (“CO”), however, only qualifies as an Authorised Financial Accounting Standard. Other international accounting standards commonly applied in Switzerland such as IFRS and US GAAP are clearly also Acceptable Accounting Standards.
So, considering the above rules it seems clear that as long as a group prepares its CFS using Swiss GAAP FER or IFRS/US GAAP, this would also be the basis for the GloBE considerations and calculations.