Accounting

Swiss Statutory Accounting
The Swiss Code of Obligations does not contain any provisions on how Pillar Two Incentives should be accounted for. Regarding Government Grants, it is essential to distinguish whether they are intended for the purchase of assets or for other activities. If the grant is for an asset, it can be recognized either as a reduction in acquisition costs (net method) or as deferred income, which is reversed over the asset's useful life (gross method). Conversely, if the grant is for an activity, it must be recognized as non-operating income. According to Deloitte's view, QRTCs can be recognized either as a reduction in tax expense or as non-operating income in the year of payment.

IFRS
Under IFRS, two standards must be considered: IAS 12 (Income Taxes) and IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance).

According to Deloitte, Government Grants fall under IAS 20 and, depending on their nature, should be classified either as "grants related to assets" or "grants related to income." Since the Government Grants provided by the cantons are typically not linked to any future obligations of the company, they are generally treated as "grants related to income." Once there is reasonable assurance that the Government Grant will be awarded, it can be recognized either as income (gross method) or as a reduction in expenses (net method).

Regarding QRTCs, Deloitte notes that there are no explicit provisions under IFRS. Both IAS 12 and IAS 20 mention "investment tax credits" and exclude them from their scope (IAS 12.4, IAS 20.2). Therefore, a careful examination of the specific characteristics of the QRTC and its associated terms and conditions is necessary to determine which standard excludes the respective tax benefit. As part of a discretionary decision, the reporting entity must select the most appropriate accounting method in accordance with IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors). Depending on the specific facts and circumstances, it may be suitable to draw an analogy with the treatment under IAS 12 or IAS 20. The discretionary decision and the chosen method must be disclosed in the notes (IAS 1.122).

If the QRTC is accounted for under IAS 12, the payment must be treated as a reduction in current tax expense and current tax payable (IAS 12.12). If the QRTC cannot be fully credited against taxes due in the current period, a deferred tax asset may need to be recognised (IAS 12.34 ff.).

If the QRTC is accounted for under IAS 20, the aforementioned explanations apply.

Swiss GAAP FER
Under Swiss GAAP FER, two standards must be considered: FER 11 (Income Taxes) and FER 28 (Government Grants). Tax benefits and effects do not fall under FER 28 (FER 28/11).

In Deloitte's opinion, Government Grants fall under FER 28 and must be reported in the income statement either separately or within the aggregated item "other operating income." Offsetting against expenses is permissible only in objectively justified cases.

For QRTC, an assessment aligned with IFRS is necessary to determine whether it more suitable to apply FER 11 or FER 28 by analogy. If it is accounted for under FER 11, the QRTC received must be reported as a reduction in current tax expense and current tax payable (FER 11/2-4). If the QRTC cannot be fully credited against taxes due in the current period, a deferred tax asset may be recognized if the requirements are met (FER 11/22).

If the QRTC is accounted for under FER 28, the aforementioned explanations apply.
 

Pillar Two

Although QRTCs can be credited against taxes due, thereby reducing the tax liability, they are treated preferentially when determining the effective GloBE tax rate due to their subsidy-like nature. The prerequisite is that the QRTC meets the formal and material requirements in accordance with the OECD Model Rules (e.g., mandatorily paid out after four years). Currently, Deloitte views all QRTCs in Switzerland as designed to meet these requirements.

When determining the effective tax rate, the QRTC is not treated as a reduction in Covered Taxes (numerator) but as an increase in GloBE Income (denominator). If reported as a reduction in current taxes under the relevant accounting standard, both Covered Taxes and GloBE Income must be increased by the QRTC amount. If the QRTC is already recognized as other income and not as a reduction in tax expense, no adjustments are necessary.

Example
A Ltd. (tax rate: 16%) with a taxable profit of 10m (GloBE Income, based on IFRS) and income taxes (Covered Taxes) of 1.6m receives a QRTC of 0.4m. Due to the credit, the income taxes due are reduced to 1.6m - 0.4m= 1.2m. The GloBE effective tax rate is 1.6m ÷ (10m + 0.4m) = 15.4%. As the effective tax rate is above 15%, no top-up tax is payable.

Government Grants are typically recognized as other income rather than a reduction in taxes under applicable accounting standards. No adjustments are necessary under the OECD Model Rules, and they are therefore treated similarly to QRTCs.
 

Swiss VAT

There is currently no officially communicated practice from the Swiss Federal Tax Administration (“SFTA”) regarding the VAT treatment of cantonal Pillar Two incentives. Although the SFTA has communicated that a dedicated specialist working group for subsidies has been set up, no guidelines on how to specifically deal with these tax incentives under the Swiss VAT rules were rendered public yet.

According to general applicable rules, Pillar Two Incentives do not fulfil the condition of an exchange for a supply. The absence of an exchange of supply is crucial in the qualification of a subsidy or public law contribution and leads to the conclusion that the new cantonal instruments, consisting in financial support, exemption, or other tax relief, granted by a canton to a company within the framework of the cantonal location or economic promotion legislation, fall into the category of subsidies and public law contributions according to art. 18 para. 2 let. a Swiss VAT Act.

Subsidies are considered as so-called non-turnover and are, therefore, not subject to VAT. However, for the recipient, they result in general in a proportional reduction of input VAT. Various input VAT reduction methods can be applied to the advantage of the company, provided that the chosen method leads to a reasonable and correct result. For instance, if the contribution is used to cover an operating deficit, input VAT should be reduced based on the ratio of the funds in proportion to the total turnover. Moreover, if the recipient can demonstrate that the contribution is linked to an activity or cost on which no input VAT was incurred (e.g., wage subsidies), no input VAT correction would be required. This is particularly interesting as the Pillar Two Incentives may be determined based on various criteria (among which the headcount of a company).

Thus, even if these Pillar Two Incentives are not subject to VAT, they have likely a direct impact on the recoverable VAT position of the company. Taxable recipients are, therefore, requested to examine whether they should reduce their input VAT even in cases where the cantonal government does not explicitly refer to the Pillar Two incentive as a “subsidy”. The circumstances and conditions leading to the benefit granted to a company are decisive to establish the potential VAT impact. This is the reason why each case must be examined individually (there is no "one case fits all" solution) and preferably should be ruled by means of a written request towards the SFTA.