The Q&A aims at achieving a certain level of consistency with regard to the tax accounting implications of the Swiss Tax Reform in IFRS financial statements. Reporting entities applying IFRS should consult the Q&A.
The Swiss Tax Reform was approved with a majority of 66.4% in a popular federal vote on 19 May 2019. Already on 5 July 2019, EXPERTsuisse, the Swiss Expert Association for Audit, Tax and Fiduciary, published on its webpage the Q&A “Tax Accounting Impact due to the Federal Act on Tax Reform and AHV Financing (TRAF)”. This document provides valuable insights regarding the tax accounting implications resulting from the substantive enactment of Swiss Tax Reform. The Q&A is applicable for companies preparing IFRS financial statements. Additionally, similar considerations can be applied under Swiss GAAP FER. Reporting entities preparing US GAAP financial statements are advised to consult their tax or financial accounting advisors with regard to potential differences between IFRS and US GAAP.
The following key topics are addressed in the Q&A document.
Meaning of the term “substantive enactment”
IAS 12.46 and IAS 12.47 require current and deferred taxes to be measured using tax rates or laws enacted or substantively enacted at the end of the reporting period.
In Swiss tax law, there is an interplay between the federal and cantonal tax laws. The Federal Tax Harmonization Act (“FTHA”) is a federal law that provides a framework and general guidelines to the cantons. The cantons themselves are obliged to implement the mandatory guidelines of the FTHA into cantonal law. Cantonal tax regulations are only applicable for tax-paying entities once the cantonal legislative process is completed.
Taking this relationship into account, the Q&A concludes that “substantive enactment” of the tax reform is only given once the cantonal legislative procedures are also completed. As an example, a company based in Zurich that is currently taxed under the mixed company regime may only consider the tax reform – including the abolishment of the mixed company relief and the reduction of the ordinary corporate income tax rate in Zurich – in its IFRS financial statements once the canton of Zurich has substantively enacted its amended cantonal tax law (a popular vote is scheduled for 1 September 2019). This approach reduces the number of one-time effects and reconciling items a reporting entity needs to consider during the year 2019.
In Switzerland, a law is usually considered as being substantively enacted once this new law is approved by parliament and the referendum period has passed or once the public vote accepted the new law (if a new law is either mandatorily or optionally subject to such public vote). Subsequent steps, like the publication of the law in an official gazette, are purely of a formal nature and do not change the content of the law and are therefore irrelevant for IAS 12 purposes.
Special rules apply with regard to the abolishment of the principal allocation and Swiss finance branch reliefs that were withdrawn by the Swiss Federal Tax Administration on 24 May 2019 with legal effect as of 1 January 2020.
Abolishment of special tax regimes/transitional measures
Most cantons offer two temporary reliefs when a company is no longer in a position to apply a privileged tax regime after 31 December 2019; (1) the step-up regime or (2) the dual rate approach (sometimes also referred to as ‘two rate’ or ‘separate rate’ approach).
The Q&A confirms the view that the step-up regime is creating a temporary difference between the tax base of an asset or a liability and the IFRS carrying value. This temporary difference leads to a DTA (or the reduction of a previous DTL), subject to recoverability and measurement considerations. The initial recognition exemption of IAS 12.22 and IAS 12.24 is not applicable as there is no transaction leading to the initial recognition of an asset or a liability in the IFRS financial statements.
The Q&A further concludes that the application of the dual rate approach is not leading to a DTA as there is no impact on the tax bases of assets and liabilities. Furthermore, the IFRS carrying values are also not changing. Additionally, the reporting entity is entitled to apply a lower tax rate – which is explicitly mentioned in the respective cantonal tax law – on a portion of its taxable profit during a period of up to five years.
As the lower tax rate under the dual rate approach is only applicable for a maximum of five years, companies will need to prepare a sufficiently detailed scheduling of the reversal pattern of their temporary differences in order to record and measure the correct deferred tax balances.
The Q&A of EXPERTsuisse is also providing valuable insights on the tax accounting implications of the patent box.
As the patent box deduction only comes into existence once future qualifying profits are generated, no benefit should be recognized for the regime in anticipation of the year in which the entity is entitled to the patent box deduction. There is neither a tax credit nor a deductible temporary difference in existence related to the availability of future patent box deductions.
However, a tax-deductible temporary difference could result if a reporting entity is moving into the patent box and if the particular canton applies the entry mechanism as stated in the FTHA (recapture of previously deducted R&D expenses). No tax-deductible temporary difference results if a canton applies the same entry mechanism as proposed by the canton of Zurich and Zug or the entry rules of the canton of Basel-Stadt.
The Q&A confirms the view that the optional R&D super-deduction is subject to the rules of IAS 12 and not IAS 20 (government grants). Additionally, the R&D super-deduction is leading to a reconciling item in the year when this relief is claimed by a reporting entity. Unlike other jurisdictions, there is no legal basis in Switzerland to carry-forward the R&D super-deduction to a subsequent tax year. As a result, there is no basis to record a DTA.
Notional interest deduction (“NID”)
The NID is most likely only applicable in the canton of Zurich. Again, this relief should also be treated as a reconciling item in the year this benefit is claimed.
Order of measures/maximum relief limitation
The FTHA requires cantons to limit the overall benefit of the various measures (excl. the dual rate approach) to a maximum relief of 70% (or lower) of the taxable profit before the application of the participation exemption and the use of losses carried forward.
Reporting entities should consider their expected filing position (assuming this will be accepted by the tax authorities) and define an accounting policy regarding the ordering of the measures unless a particular canton has explicitly defined such ordering in its cantonal tax law.
Swiss reporting entities preparing IFRS financial statements are strongly advised to assess the implications of Swiss Tax Reform and to analyze the tax accounting implications. The Q&A of EXPERTsuisse provides valuable guidance in this regard and outlines the view that the members of EXPERTsuisse will apply when auditing the financial statements or advising on the tax accounting implications of Swiss Tax Reform.