New Swiss transfer pricing guidance

The Swiss Federal Tax Authorities (SFTA) have recently published their most comprehensive commentary on transfer pricing (TP) to date, and in fact the first substantial publication on transfer pricing from a Swiss tax authority. The so-called article is in fact one of the “tax summaries” issued by the Swiss Tax Conference (STC) in cooperation with SFTA. The article is available in French and German only at this stage.

The arm's length principle has always applied in relation to profit and withholding taxes in Switzerland. However, apart from the SFTA’s administrative circular on intercompany financing transactions, until now there has never been any published guidance on the application of the arm’s length principle in Switzerland.

Summary

The article defines the arm’s length principle, states the existing legal basis for its application in Switzerland, and elaborates on its interpretation. It provides guidance on how to perform a comparability analysis, explains the OECD transfer pricing methods as well as specific aspects of intragroup services, intangibles, and financial transactions. 

It also refers to the three-tiered approach to transfer pricing documentation (i.e., Country-by-Country Reporting, Master File and Local File) and clearly states that Switzerland only requires Country-by-Country Reporting. The article finishes by pointing out existing procedures to avoid and resolve transfer pricing disputes. Reference is made to the OECD TP Guidelines (OECDTPG) through the different chapters as well as to Swiss administrative practice and even relevant case law. 

The SFTA refer specifically to the 2022 OECDTPG, so presumably the SFTA are applying the most recent version of this guidance at any point in time, and taxpayers will need to be vigilant to maintain their transfer pricing up to date with changing international standards. 

Key aspects

The article refers to the latest version of the OECDTPG published in 2022 and states that the Swiss tax authorities and courts increasingly resort to them for interpretation of the arm’s length principle. Upon defining the arm’s length principle, reference is made to its legal basis on both profit tax and withholding tax in the relevant Federal Acts (several administrative circulars that directly refer to the arm’s length principle are also quoted).

Furthermore, consequences of non-compliance with the arm’s length principle are mentioned. In particular, when it comes to profit tax, payments in excess of those made at arm’s length constitute a hidden profit distribution, i.e., a deemed dividend (when paid to the shareholders e.g., parent company) or hidden capital contribution (when paid to subsidiaries). In the case of withholding tax, excessive remuneration shall constitute non-cash benefit subject to withholding tax. Under Swiss law, payments between sister companies can also give rise to such hidden dividends or capital contributions, but this is not specifically addressed in the document.

The application of the arm’s length principle is assessed by the Swiss courts in the context of the comparability analysis, particularly when analyzing hidden distribution of profits and non-cash benefit. The article refers to the nine steps laid out by the OECD for conducting the comparability analysis but acknowledges that it is not mandatory and other approaches leading to reliable results are also permitted.

With respect to the determination of the years to be included in the analysis, the Swiss tax authorities generally do not accept comparability analyses based on data too far away from the year under investigation (Step 1 of the comparability analysis).

The SFTA also refrain from using external secret benchmarks as the legal provisions on tax secrecy would prevent its disclosure in support of the position in any legal proceedings. Reference is made to specific industry standard commercial databases for potential external benchmarks such as Bloomberg, Loan Connector, TP Catalyst, etc. (Step 5 of the comparability analysis).

With respect to the arm’s length remuneration, the SFTA set out the view that, assuming the benchmark is constructed using reasonably comparable transactions, any value falling within the interquartile range is arm’s length compliant. This position seems to accommodate well to both the OECDTPG and the EU TP Directive draft.

The article generally refers to the OECDTPG when defining the transfer pricing methods as well as the special considerations on intangibles, financial transactions and intragroup services. Therefore, by following the OECDTPG on these topics one can assume that one is fully in line with the stance of the Swiss Tax authorities (subject of course to disputes about the correct identification of the transaction and of the comparables). 

While defining the OECD three-tiered approach for TP documentation, the document explicitly states that the only Swiss documentation requirement is the Country-by-Country Reporting for groups whose consolidated revenue exceed CHF 900 million. However, reference is made to the Swiss legal basis under which the taxpayer is obliged to cooperate, according to which the necessary documentation supporting the arm’s length compliance of the scrutinized transaction or setup must be provided at the request of the competent authority. In practice, many Swiss groups voluntarily prepare both local and group TP documentation as part of supporting their foreign TP filings and to anticipate such eventual inquiries.

Especially useful is the section 7 on procedural aspects because it defines the different competent authorities depending on the context. In general, the Cantonal tax authorities are responsible for levying profit taxes, including TP aspects thereof, while the Federal tax authorities administer the withholding taxes system, again including TP aspects thereof. Both are able to review TP matters in an audit or review context (i.e., post filing of the tax return) as well as pre-filing in the context of a ruling.

Transfer pricing rulings (unilateral) regarding corporate income tax and withholding tax are responsibility of the Cantonal tax authorities and the Federal Tax authorities respectively. The article states that a given transaction might have consequences under both taxes and recommends simultaneously submitting the ruling to both tax authorities. As part of the supporting documentation to the ruling, it explicitly refers to a transfer pricing study establishing that the relevant transactions are consistent with the arm’s length principle as defined by the OECD.

The State Secretariat of International Finance (SIF), on the other hand, represents Switzerland’s interests in financial, monetary and tax matters vis-à-vis partner countries and competent international bodies. The SIF therefore has exclusive authority to negotiate transfer pricing advance agreements and mutual agreements with Switzerland’s partner states.

In contrast to rulings, the preliminary agreements of bilateral or multilateral advance pricing agreements are negotiated by SIF and the competent authorities of the partner states. The article includes a link to access to the request form.

The discussion on the different competencies within the Swiss system also includes primary and secondary adjustments, which are adjustments to the tax situation as a result of application of the arm’s length principle differently to how the taxpayer interpreted it.

In Switzerland, as primary adjustments are made in relation to the taxpayer’s taxable profits, these are the sole responsibility of the Cantonal tax authorities. They are also competent for the corresponding adjustment resulting from a primary adjustment made by a foreign state. A useful example is provided showing the mechanics of the primary and corresponding adjustment in the context of a mutual agreement.

The secondary adjustment is the one made over what the OECD refers as secondary transaction, i.e., a constructive dividend as a result of a non-arm’s length dealing. Under the Swiss tax system, a remuneration above the arm’s length principle might constitute a constructive dividend upon which withholding taxes are levied. The “Swiss secondary adjustment” exists as the possibility for the SFTA to levy withholding taxes on such a constructive dividend. As this concerns withholding taxes only the SFTA can make such an adjustment, and it can do so irrespective of a potential primary adjustment previously made by the Cantonal tax authority for the same transaction. Both SIF and the SFTA have developed a practice when this situation arises in the context of APAs and mutual agreement procedures, including for the SIF to agree that no secondary adjustment will be made.

Our views

While most jurisdictions rely on the OECD TP Guidelines, there is a high degree of disparity when it comes to implementation and interpretation. In fact, the recent draft of the EU TP Directive aims at tackling this issue across the EU. Meanwhile, the SFTA have made the more pragmatic choice, perhaps also reflecting the differing levels of maturity in relation to TP across the different Swiss Cantons, to release a more summarized and generic non-binding guidance comprising a variety of practical recommendations that will help Swiss taxpayers to gain tax certainty. 

At the same time, this guidance reinforces the increased scrutiny of TP in Switzerland and serves as reminder to taxpayers that what has been accepted in the past still needs to be re-assessed against changing international norms and stricter Swiss examination. The Swiss community of transfer pricing practitioners welcomes this useful guidance. 

 If you want to discuss the potential impact on your group and existing TP policies, please reach out. 

Ernst & Young Ltd, Switzerland

• Francisco Palacios, Partner, EY Switzerland Financial Services Transfer Pricing Leader
• Nathan Richards, Partner, EY Switzerland Operating Model Effectiveness and Transfer Pricing Leader
• Xavier Eggspuhler, Partner, Transfer Pricing & Operating Model Effectiveness
• Ioseb Nutsubidze, Partner, Transfer Pricing & Operating Model Effectiveness
• Hubert Stadler, Partner, Transfer Pricing & Operating Model Effectiveness