A contribution from Xavier Oberson, Professor at the University of Geneva, Attorney-at-
Law, Oberson Abels
In July and again in October 2021, a veritable tax revolution took place. Nearly 140 countries, members of the OECD’s Inclusive Framework, including Switzerland, have accepted the main principles of a general overhaul of the taxation of large multinational companies. The major development of the digital economy has revealed the shortcomings of an obsolete tax system, based on century-old principles rooted in the vision of an industrial society made up of factories, warehouses, branches and other forms of physical presence on a territory to carry out a commercial activity. In order to include in the tax base a portion of the profits of multinational enterprises offering online digital goods or services to user and consumer worldwide, based on a digital presence or platforms, numerous States have introduced unilateral and uncoordinated digital services taxes. To avoid real international tax chaos and, at the same time, adapt the international tax regime to these new business models, the OECD, as of 2019, has proposed a compromise based on a two-pillar system. This solution was accepted in 2021. This highly ambitious project was initially due to come into force in the various States on 1st January 2023. However, since, the situation has evolved considerably ; the initial enthusiasm is much more measured and the evolution of the project is, from now on, rather uncertain. In order to describe the impact of this major development in international taxation, we will present the essential elements of each of these two pillars, before looking at how they will be implemented in Switzerland.
2. Pillar 1
The first pillar is the most revolutionary. It consists of modifying the rules for the international attribution of profits in favor of the States where the consumers and/or users are located. It gives greater taxing rights to market jurisdictions (the place where sales are made). Indeed, in the absence of a physical presence of a multinational company on the territory of a State, the latter will find it difficult to tax their profits from services or digital goods to users or consumers located on their territory. This new allocation method, initially intended for the digital economy as a whole, is now aimed in principle at all large multinational companies, based on a turnover threshold, regardless of the sector of activity concerned. Regulated financial services and extraction activities are however outside the scope. According to the agreement, this new regime would only apply to multinationals with a global turnover of more than €20 billion and a profitability rate of more than 10%. In addition, it would contain an international allocation rule based on a mathematical formula that would target so-called residual profits, i.e. those exceeding a so-called “routine” profit.
Since last year, and given the major geopolitical changes that have taken place, Pillar 1 has been struggling to be implemented according to the original timetable. Moreover, there are political internal difficulties, since this new regime requires a multilateral agreement that has to be ratified by the parliaments of the various States concerned. Indeed, Pillar 1 derogates on numerous points from the current double taxation agreements, which represent the traditional architecture of international tax law. Added to this are more technical problems, as the system, although apparently simple, requires the adoption of rules on the sources of the profits concerned, not to mention the delimitation between the various amounts falling within the scope of this system. Finally, its implementation must be accompanied by new rules for settling international disputes in order to avoid, or at least reduce, the many potential conflicts
of interpretation and application of these rules between States. Given these difficulties, some observers even believe that Pillar 1 will not see the light of day and that work should already be underway to propose another model. The problem of taxing digital companies is indeed real, but it is not certain that the Pillar 1 solution is the right one. In any case, should Pillar 1 finally not be implemented, we should continue to see the proliferation of unilateral taxes on digital services because their repeal was conditional on the adoption of pillar 1.
3. Pillar 2