The Future of Tax Incentives

What are tax incentives and government grants?

Tax incentives and government grants have a surprisingly long history, stretching back thousands of years. There is no generally accepted scientific definition.

Tax incentives are government instruments designed to encourage behaviour by reducing tax liability. They are typically based on economic activity, investment or compliance with tax policies. Modern tax incentives can be divided into different categories according to the way they work methodologically. The main distinction is whether they affect the tax base (e.g., patent box, R&D super deduction) or the tax amount (e.g., tax credits).

Government grants are direct or indirect financial assistance from government for specific purposes. They are often based on applications, proposals and meeting eligibility criteria. Such grants are paid independently of the tax system and are typically not the responsibility of tax administrations, but of other government administrations or agencies.
 

How do tax incentives work (or not) under Pillar Two?

As tax incentives target to reduce the taxable profit and hence the tax amount due, the benefit is partially or fully neutralized by a Pillar Two top-up tax. At the same time, however, the OECD Pillar Two framework also provides for tax incentives. While some of them are integrated into the OECD Model Rules (e.g., Substance-based Income Exclusion), others must be introduced proactively by individual countries as part of their domestic legislation (e.g., Qualified Refundable Tax Credits, QRTC).
 

What are trends in new incentives considering Pillar Two?

Deloitte Switzerland is observing three trends related to the future of domestic tax incentives because of Pillar Two:

• New tax incentives only for multinational groups in scope of Pillar Two;
• More substance- and input-based tax incentives;
• Shift from tax base linked to subsidy-like tax incentives and government grants
   

Which rules do countries need to follow when introducing new incentives?
 

Individual countries are confronted with a multitude of regulations that may restrict new tax incentives and government grants. These are not only international tax regulations, but also address other topics (e.g., EU State Aid, WTO trade law).

For the Swiss cantons, the OECD’s “related benefits rule” will be of primary relevance, as well as EU regulations, depending on the final content of the new bilateral framework between Switzerland and the EU. As long as the OECD has not published its administrative guidelines, Switzerland and other countries will face a high degree of uncertainty.

What additional questions arise from these new tax incentives?

Given the subsidy-like nature of new tax incentives such as the QRTC, the question arises as to whether they may have a negative impact on Swiss VAT. The question also arises as to whether such new tax incentives should be presented as a reduction in tax expense ("below-the-line") or as other income ("above-the-line"), for example under IFRS or US GAAP.

What is the state of play in Switzerland for new tax incentives?
 

The topic of new tax incentives and government grants is gaining momentum in Switzerland. As of today, the cantons of Basel-City, Grisons, and Zug published their proposals. Deloitte Switzerland expects that further cantons will be presenting concrete proposals in the coming months. However, initial trends are already apparent:

• The incentives are designed either as QRTC or as government grants and thus have – depending on their characteristics – more the character of subsidies. However, the final payout mechanism is delegated to the respective cantonal government.
• The aim is to promote activities that lead to value creation in the canton and contribute to sustainability. Surprisingly, no canton has yet come up with proposals in the area of digitalisation.
• The new incentives are not regulated in a tax act, but rather in an economic promotion act. In the future, another administrative body than the cantonal tax administration will be responsible for such instruments.

A deep dive into the future of tax incentives

Through our in-depth focus on tax incentives, we’ll help you understand the key issues. We make sure your business is prepared.