A committee report regarding the Swedish implementation of EU's Pillar II directive has been released – Deloitte's summary and reflections

By way of background, in April 2022, an existing committee was engaged to analyze the implementation of the minimum tax directive which, at the time, was yet to be adopted by the EU. Since then, progress has been made both within the EU regarding the final adaptation of the directive, and within OECD regarding guidance to the interpretation of the rules, administrative guidance, a proposal for the design of the returns and the development of safe-harbor
rules.

Given that the committee work has been undertaken in parallel with further development within both the EU and the OECD, the committee has not had time to address all relevant matters, which means that further work is expected. Below follows a summary of some important observations about what has been included in — and what has been left out of — the proposed legislation. 

For further discussion, please feel free to contact us at Deloitte – contact information can be found at the bottom of the page. For Deloitte's previous reporting on this subject, please visit our Pillar I and II landing page here (OECD Pillar One & Pillar Two | Tax | Deloitte Sweden).

The report

Introduction

The proposed new law of a top-up tax is divided into ten chapters consisting of both main rules related to Pillar II and procedural rules linked to the directive, with some references to the Swedish Tax Procedures Act
(Sw. skatteförfarandelagen). Apart from these references to procedural law, the proposed rules are completely separate from the existing Swedish income tax legislation and mostly in line the adopted EU directive. The intention seems to be that the proposed rules should mirror those in the directive.

The rules are suggested to enter into force on 1 January 2024 and would apply for the first time for fiscal years starting after 31 December 2023. 

A short overview of main rules

In short, the top-up tax rules mean that groups with an annual turnover of EUR 750 million or more will have to calculate an effective tax per jurisdiction, based on consolidated financial statements before elimination of intra-group transactions.

The calculation of the effective tax rate involves complex calculations, including both the calculation of “Qualifying Income/Loss" and "Adjusted Covered Tax". Both components shall be included in the calculation of effective tax per jurisdiction.

If the effective tax in a jurisdiction is less than 15%, top-up tax is levied up to 15%. Some relief is however granted for companies with substance in a jurisdiction in form of personnel or tangible assets, with an amount equal to the so-called “substance amount”.

Once the tax payable has been determined, the tax is allocated to a jurisdiction according to one of the following three allocation rules:

• Qualified Domestic Minimum Top-up Tax rule (QDMTT) which allocates the tax the jurisdiction of the low-taxed entity, 
• Income Inclusion Rule (IIR) which normally allocates the tax to the jurisdiction of the ultimate parent company of the group, and
• Undertaxed Payments Rule (UTPR) which allocates the tax to the jurisdiction of another entity of the group based on that entity´s share of total employees and tangible assets within the group. This rule shall not be applied until fiscal year 2025.

It can be noted that Sweden, as expected, chooses to apply the QDMTT-rule, and is already now proposing a UTPR rule even though it will not apply until fiscal year 2025.

A short overview of the procedure 

The proposed rules will require groups to submit a so-called top-up tax report, which will serve as the basis for the calculation of any additional top-up tax. The intention is that these reports later will be automatically shared between national authorities and therefore only one report per company group will have to be submitted. For groups with headquarter in a jurisdiction that does not implement Pillar II in accordance with the OECD legislation, but that has equivalent rules, a so-called simplified supplementary tax report must instead be submitted.

In addition to these reports, and similar to what is the case with country-by country reporting, all group entities must notify the local authorities about which group entity that will be submitting the top-up tax report. In addition to this, any group entity that is required to pay top-up tax according to the top-up tax report must submit a top-up tax return. The top-up tax report must be submitted no later than 15 months after the end of the fiscal year (18 months for the first transitional year), while the top-up tax return must be submitted no later than one month after that.

A decision from the Swedish Tax Agency regarding any additional top-up tax must be made no later than 3 years after the end of the calendar year in which the fiscal year in question has expired. Several procedural matters are, by reference, governed by the Tax Procedures Act. It can, however, be mentioned that any reassessment decisions to the disadvantage of the taxpayer are proposed to be made using the rules on supplementary taxation
(Sw. efterbeskattning).

The proposal also contains sanction fees: First, a report fee if the report contains incorrect information, which (according to the main rule) amounts to a minimum of SEK 250,000 and a maximum of SEK 10 million, and second, an extra fee for reports and returns submitted too late (SEK 25,000 per fee – several fees may be imposed). A link to the current tax penalty system is also proposed.

What is not included in the bill? 

Several rules have been left out of the bill, mainly due to time constraints. The rules that have not been included in the draft bill – but which can be found in the directive and/or the OECD model legislation – are for example safe harbor rules, rules on joint ventures and minority-owned company groups, rules regarding distribution-based systems (the type of tax systems found in for example Estonia), specific rules on the allocation of taxes (e.g., CFC taxes) and certain transitional provisions (including for example rules concerning transfers within groups made after November 30th 2021). We expect these rules to be presented in later versions of the proposal.

Other observations 

The report includes a comprehensive impact analysis, according to which the committee estimates that approximately 120 Swedish parent entities will be in scope of the rules. It is expected that each of these entities will have to report about 15,000 – 20,000 data points. Considering many of these data points are new in relation to the consolidated financial statements, it is expected that large investments in IT systems and for training of personnel will be necessary. The total cost for Swedish parent companies obliged to submit a top-up tax report is estimated to somewhere between SEK 580 million and SEK 1 billion.

Based on a historical review, the rules are expected to generate additional tax revenue of approximately SEK 10 billion per year.

The report also includes a special opinion/comment in which the risk for errors is highlighted, mainly due to the complexity of the regulations and the short time that the committee has had to investigate the complex rules. In the special opinion/comment, it is therefore suggested that that the committee should be given additional resources and an instruction to complete the work. At the same time, serious concerns are raised about the ability to complete the work within the set timeframe. 

Deloitte's comment on the report 

The long-awaited report contains no major surprises, other than the fact that some elements of the framework have been left out, such as the important safe harbor rules which the companies need to get clarity on, to be able to plan their work with Pillar II. We at Deloitte share the concerns expressed in the special opinion/comment regarding the timeline for the work and believe that it should be a priority to clarify how the relief rules and other omitted parts should be implemented into Swedish legislation. As pointed out by the committee, the legislation will require major efforts by companies for them to form an understanding of the rules, identify data points, develop IT systems and training personal, which is work that takes time and must be initiated already now to perform the necessary calculations and reporting in time, especially considering the relatively strict sanctions proposed.

What can Deloitte do for you? 

We at Deloitte have several ongoing discussions with multiple groups concerning several aspects of the regulations, such as interpretation of the rules, practical discussions regarding the necessary data, system support, connections to the country-by-country reporting (especially in relation to safe harbors) etc. 

Many of the dialogues we have had about how Pillar II impacts groups have started out with a direct question related to specific technical solutions for calculations and reporting, but quickly evolved into more general discussions about automation and, above all, the obvious need for more automated solutions to direct tax reporting. We have extensive experience on such technology projects, both in implementing new system solutions for direct tax and in adapting existing systems, for example, in order to deal with existing and future requirements for tax calculations and for reporting, where Pillar II is a very good example of the latter.

We are more than happy to discuss any questions you might have regarding Pillar II, how the proposed regulations may impact you, automation of Pillar II reporting and other matters regarding direct taxes.