Pillar II - Proposal to the Council on Legislation

Recently, a lot of attention has been given to the Pillar 2 administrative guideline published in June 2024 as the completion of the domestic law on the top-up tax (which implemented the administrative guidelines in 2023). In this article we briefly describe the draft amendments which were made to the Swedish Council on Legislation on August 15. In addition, we cover news about reporting and updates to the CbCR that have emerged over the summer.

1. Proposal to the Council on Legislation presented in relation to amendments to the provisions on the top-up tax for companies part of large groups

On August 15, the Swedish Government published draft amendments to the Swedish Top-Up Tax Act from December 2023. The draft amendments take into account the comments that have been submitted to the proposal in the memorandum that was submitted in March. 

The amendments provide a further explanation that group contributions must be treated according to the financial meaning of the transaction, which means that the contribution should be treated as dividends or capital contributions. Furthermore, a provision is introduced to clarify what it means that the temporary safe harbour rule cannot be applied to artificial arrangements. This clarification states that customary business transactions are not the target of the regulation on artificial arrangements. The new provision shows what is meant by a cost or loss not being matched by a reported income or profit of the group unit's counterparty.

In addition, a clarification is made regarding the application of the rule on national accounting standards, which means that it cannot be applied unless all Swedish companies apply the same accounting standard. The provision allowing unreported deferred tax assets to be considered during the transition to the new system is proposed to be extended. This extension will encompass all types of deferred tax assets that have undergone value adjustments in the accounts, not just those related to loss deductions.

Regarding so-called excess tax amounts, provisions are proposed to address situations where a group entity exits the group, as well as the rolling back of losses to be offset against previous years' profits. For insurance companies that are not mutual insurance companies but are liable for Swedish yield tax, it is proposed that the option to be treated as a tax-transparent entity should also apply to them, which is a simplification. Furthermore, certain amendments are made regarding joint ventures and joint venture groups. Notably, the primary and supplementary rules for the top-up tax will not apply to top-up tax amounts for these entities. It is also proposed that a Swedish group entity should be liable for the entire top-up tax amount calculated and allocated to a joint venture and its subsidiaries, provided that the company is domiciled in Sweden and is part of the same group as the Swedish entity. This is a change from the earlier memorandum where it was proposed that the joint venture and its subsidiary would be liable for the top-up tax. Lastly, the proposal also allows that the foreign top-up tax could be offset even if that tax is paid by a different entity than the entity where the top-up tax is calculated.

2. New regulations on disclosure of information

It appears from the referral to the Council on Legislation, that certain consultation bodies have requested clarifications regarding the OECD's proposed relaxation of reporting rules. According to the proposal, a group that utilises an exemption or a safe harbour rule shall not be required to provide more information than what is necessary to assess whether the criteria for the exemption or safe harbour rules are met. On June 13, amendments in the Tax Procedure Ordinance concerning this matter were decided, which will come into effect on August 1, 2024. In addition to clarifying which identification information must be provided, several exemptions from the information required in a supplementary tax report under the Swedish Tax Procedure Act are being introduced.

The referral to the Council on Legislation indicates that the government intends to come back with clarifications regarding the safe harbour rule for national top-up tax and penalty relief. It also appears that the negotiations within the Inclusive Framework on the automatic exchange of top-up tax reports are still ongoing and that the government intends to return to this issue and certain other procedural issues as well.

Limitation of information to be provided in certain cases

The first exception applies to the situation when a Swedish group entity is not and cannot be liable for tax under the Swedish Top-Up Tax Act for another group entity's top-up tax amount calculated in a different state. In that case, there is no requirement to provide information concerning that state. This means, among other things, that if the conditions are met, there is no need to specify the effective tax rate for each state, the top-up tax amount for each group unit, or the distribution of top-up tax according to the main and supplementary rules for each state. Additionally, a list of the choices made according to the Swedish Additional Tax Act does not need to be provided.

However, if the parent company or the reporting unit is domiciled in Sweden according to the Swedish Top-Up Tax Act, this exemption does not apply. Moreover, a special provision applies to the supplementary rule.

Activities of limited importance, the five-year transitional safe harbour rule

For activities of limited significance, for the exemption from the five years’ rule, and when choosing a transitional safe harbour rule, it is specified what information must be provided. This means that different information must be provided than what is currently required by the regulations.

Simplified jurisdiction-based adjustment for a state

Finally, an option is introduced for the reporting entity to choose a simplified jurisdiction-based adjustment for a state during a transition period. This means that information on adjustments can be provided in aggregate for the group entities within the same state when it comes to information necessary for calculating the effective tax rate.

This option applies if no top-up tax amount needs to be calculated for that state, or if a top-up tax amount needs to be calculated but does not need to be allocated among the group entities in that state.

3. Update of the OECD report on country-by-country reporting

In order for data from a country-by-country report to be used for the purpose of applying the  transitional safe harbour rule, the report must be considered qualified. It is therefore important to understand what is required for a country-by-country report to be qualified, if companies intend to apply the temporary safe harbour rule for the purpose of top-up tax calculations.

A country-by-country report is considered qualified if it has been established in accordance with Chapter 33 a. in the Swedish Tax Procedures Act (which implements an EU directive adopted in 2016). Given that the directive is based on the OECD's BEPS Action 13, it is deemed appropriate to consider OECD standards when establishing the rules for country-by-country reporting. Moreover, special attention should be paid to future developments at the OECD level. In order to determine whether a country-by-country report is qualified, it is therefore important to consider the recommendations issued by the OECD, for example the report Guidance on the Implementation of Country-by-Country Reporting: BEPS Action 13, where practical questions for the preparation of country-by-country reports are formulated and answered.

The 2024 update of the report is a clarification in relation to the administrative guidelines published in December 2023 regarding payments from other group units that are reported as dividends in the paying unit's qualified financial report.

According to the administrative guideline, data in the qualified financial reports should not be adjusted based on their tax treatment. An intra-group payment that is included in the profit before tax for the recipient and as an expense for the payer, in both cases concerning their qualified financial reports, should therefore also be included in the revenue and profit before tax for the recipient, irrespective of the transaction's tax treatment. The example given is a payment on preference shares that is treated as interest by both parties for accounting purposes, but as a dividend for tax purposes. In such a case, the payment should be included in the revenue and profit before tax for the recipient. Only when the payment is accounted for as a dividend in the payer's qualified financial report should the amount be excluded from the revenue and profit before tax for the recipient in the Safe Harbour calculations.

The questions and answers provided in the OECD's report are not legally binding but serve as clarifications aimed at ensuring uniform reporting. According to the Swedish Tax Agency, guidance can be drawn from these answers provided that they do not conflict with, or go outside the Swedish legislation on country-by-country reporting, or refer to situations that do not occur in Sweden.

Comment

Soon, the Council on Legislation will begin its review of the proposals and present amendments to the provisions on top-up tax for companies being a part of large groups. The Legislative Council will then issue an opinion on the proposals and later this autumn, a bill will be adopted.

It is welcome that it is specified what information should be provided in the top-up tax report in the situations mentioned above, and that the regulations result in a simplification of the reporting in certain cases.

As for the update of the CbCR report, it is likely to have limited significance for most Swedish groups. However, it can be stated that despite the OECD's recommendations regarding the implementation of country-by-country reporting and the application of the transitional safe harbour rule, different countries may have different views on what can disqualify a country-by-country report. It is therefore important to understand what is required for the country-by-country report to be considered qualified in the countries where groups intend to apply the transitional safe-harbour rule.

PwC has a dedicated focus group specialising in Pillar II and is happy to assist with questions related to the rules.