News : Switzerland votes to adopt a global minimum tax

Tuesday, June 20, 2023

Switzerland votes to adopt a global minimum tax

Jun 20, 2023

THE SNOWBALL EFFECT: Given that Switzerland has been derided as a tax haven for its low corporate tax rates and its banking system has long been the subject of scrutiny by U.S. lawmakers for facilitating systemic tax evasion by wealthy Americans, one might not have guessed the nation would be something of a trend-setter in efforts to establish a new international tax framework.

But, in a referendum on Sunday, Swiss voters approved by an overwhelming 78.5 percent margin a global minimum tax spearheaded by the OECD that would subject the largest international companies to a 15 percent minimum tax, teeing up the levy for implementation in 2024.

It’s worth taking a step back for a moment to consider how the dynamics around this global minimum tax have substantially shifted to the point that it is on the precipice of reality in many parts of the world — despite the cynicism of many observers who (still) doubt that the OECD could ever forge an agreement that would prove politically sustainable.

(For reference, according to a tracker by accounting firm EY that was updated as of June 9, 13 countries have introduced draft legislation or adopted final legislation transposing the global minimum tax, otherwise known as Pillar Two of the OECD’s framework, into their national laws, while many other countries have committed to doing so through official communications. In addition, the EU adopted the tax late last year.)

You could perhaps chalk part of the shifting momentum to growing consensus around the stated commitment of the OECD framework to promoting global tax fairness and preventing corporate profit-shifting.

But a big part of this snowball effect, surely, has to do with the fact that countries are starting to face the very real threat of ceding tax revenue to other jurisdictions if they don’t participate.

Namely, the primary enforcement mechanism for Pillar Two, the so-called undertaxed profit rule, allows a country that has enacted the minimum tax to “tax up” the effective rate of a multinational if it is paying less than 15 percent in taxes and headquartered in a jurisdiction that hasn't yet enacted Pillar Two.

Republicans in Congress loathe the tax, saying it represents a breach of sovereignty over Congress's taxing rights, and have introduced legislation to retaliate against it.

But the recent developments suggest that time is not necessarily on the GOP’s side as more and more countries comply out of fear of losing out of billions of dollars' worth of tax revenue.

A CONSEQUENTIAL CAMPAIGN: The timeline of the OECD's framework is one more reason why, as our Burgess Everett and Sarah Ferris reported yesterday, the outcome of the 2024 campaign will be hugely influential in shaping America's tax trajectory for years to come.

Besides the expiration of individual income rates and the rest of the Tax Cuts and Jobs Act looming in 2025, Democrats would likely need control of all three branches of government to pass a tax compliant with Pillar Two—though, as we've explained before, a Republican president could potentially slap retaliatory taxes on a foreign country wielding the UTPR just by using the power of the executive branch.

What are your plans for tax “Armageddon?”

Email: bfaler@politico.com, bguggenheim@politico.com and teckert@politico.com.

Or Twitter: @tobyeckert, @brian_faler, @ben_guggenheim, @POLITICOPro and @Morning_Tax.

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BUSINESS FRIENDLY: Here’s the really interesting part of the recent Swiss referendum on the global minimum tax: It was cheered on not only by several political parties but also by the business community itself.

“Regardless of today’s result, Switzerland knew that the historically important location factor of 'low profit taxes' and thus tax competition in general would lose importance," said SwissHoldings, a federation of industrial and service companies, in a statement applauding the referendum outcome. "This means that the cards will be reshuffled.”

If we don’t comply, “the tax revenue would simply go to other countries,” Monika Rühl, director of the business federation Economiesuisse, told a Swiss outlet in May in anticipation of the referendum. “If we were to let that happen, we would be shooting ourselves in the foot.”

The tax is estimated to generate between 1 and 2.5 billion francs per year, with 75 percent of that revenue distributed to Switzerland's cantons and 25 percent going to the federal government's coffers.

BIDEN’S MINIMUM TAX: Ahem, well now that we’re done dissecting the 15 percent global minimum tax, let’s move onto that 15 percent book tax on the most profitable American companies that was enacted last year under the Inflation Reduction Act (and yes, the two taxes are actually two entirely different 15 percent minimum taxes, as confusing as that may be).

The new levy that takes effect this year for companies making $1 billion or more was by far the biggest revenue raiser used to pay for the IRA's climate and health initiatives. The tax was estimated to rake in $258 billion.

But here’s a dauting thought for Democrats: The tax may not be constitutional.

As Mindy Herzfeld writes in an article in the trade publication Tax Notes, the potential problem arises in a constitutional principle called nondelegation that says only federal agencies can wield federal powers.

And the unique thing about Biden’s new tax is that it relies on financial statement income — the accounting rules for which are determined by a private body called the Financial Accounting Standards Board.

Democrats intended the tax to apply to financial income as an alternative to traditional taxable income, precisely so that they could ensure companies would pay at least 15 percent, but the fact that FASB would in effect be determining the rules by which companies are taxed could be interpreted by the courts as an unconstitutional delegation of federal power.

That’s especially so, Herzfeld writes, because the Constitution very clearly designates the authority to lay and collect taxes solely to Congress. To boot, in contrast to the oversight authority that the SEC, for instance, wields over private financial regulators, the part of the government responsible for writing tax rules (Treasury) has absolutely no oversight whatsoever of FASB.

GOVERNMENT WEAPONIZATION: Rep. Jim Jordan (R-Ohio), in his capacity as chair of both the Judiciary Committee and its Subcommittee on the Weaponization of the Federal Government, wrote to IRS Commissioner Danny Werfel last Friday detailing a case of alleged improper conduct by an IRS agent.

According to the letter, an IRS agent secured entry to the home of a taxpayer in Marion, Ohio under the false pretense that the taxpayer owed taxes on their estate, even though the agent later revealed that the true purpose of the visit was to follow up on several delinquent tax return filings.

The letter says that the agent used an alias as opposed to their real name and subsequently filed a complaint with the Treasury Inspector General for Tax Administration when Marion’s police department, believing that the field visit was part of a scam, told the agent that he would be arrested if he went to the taxpayer’s home again.

The case is but the latest instance of alleged misconduct by the IRS amplified by House Republicans. Jordan and House Ways and Means Chair Jason Smith(R-Mo.) have raised similar concerns about alleged political interference into an IRS probe of Hunter Biden's taxes and an alleged IRS visit to the home of journalist Matt Taibbi during Taibbi's testimonies before Congress.

Around the World

The Telegraph: “How inheritance tax is changing the face of rural Britain”

Guardian: “Australia’s shadow economy leeches $12.4bn from tax revenue amid Treasury’s failure to crack down”

Bloomberg: “Geneva Voters Turn Down Wealth Tax Increase for Richest 1%”

Around the Nation

Texas Tribune: “Gov. Greg Abbott vetoes more than 70 bills amid property tax impasse”

WBUR: “Mass. Senate unanimously approves nearly $590 million tax relief package”

Accounting Today: “IRS had a hard time reconciling CTC payments”

Also Worth Your Time

Reuters: “EU exec proposes new withholding tax rules to attract investors”

Colorado Sun: “Colorado ski resorts enjoyed a record season with mountain towns harvesting highest-ever tax revenue”

Did you know?

The Beatles’ song “Taxman” from their 1966 album Revolver was written in protest of progressive tax policies implemented by the British government at the time. The song called out by name then-Prime Minister Harold Wilson and leader of the conservative party Ted Heath.

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