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Introduction to transfer pricing in Switzerland
Transfer pricing rules
- Switzerland has no formal transfer pricing legislation, although all related party transactions with Swiss entities must be carried out on arm’s length terms (Art. 58 Para. 1 lit. b lemma 5 of the Swiss corporate income tax act). Based on the circular letter number 4 dated 19 March 2004, the Swiss tax authorities emphasize that the OECD Guidelines are to be followed by multinational companies.
- In general, Switzerland follows the OECD Guidelines, except for interest rates on loans granted to or from shareholders or related parties.
Transfer pricing methods
- All transfer pricing methodologies are accepted as per the OECD Transfer Pricing Guidelines.
- If transfer prices are challenged by the Swiss tax authorities (eg tax audit), the taxpayer must provide supporting documents and information demonstrating sound economic and commercial reasons for related party transactions, and thus, that the arm’s length nature of transfer prices applied. Thus, it is strongly recommended to Swiss taxpayers to prepare and maintain an OECD compliant transfer pricing documentation defending all income and expenses from related party transactions well before this is requested by the Swiss tax authorities (ie self-assessment regime).
Transfer pricing documentation
Preparation of transfer pricing documentation
- There is no formal Swiss transfer pricing documentation requirement. However, a Swiss taxpayer has to prove its tax-deductible expenses whereas the Swiss tax authority has to prove adjustments increasing the taxable profit. If a taxpayer fails to prepare supporting documents, the burden of proof shifts to the taxpayer. If transfer prices are challenged by the Swiss tax authorities (eg tax audit), the taxpayer must provide supporting documents and information demonstrating sound economic and commercial reasons of related party transactions, and thus, the arm’s length nature of transfer prices applied.
Master and local file
- To prove the arm’s length nature of intragroup transactions a transfer pricing documentation should be prepared. As per current Swiss transfer pricing practice, a Swiss taxpayer should prepare a master and local file including benchmark study in line with OECD TP guidelines and Swiss practice.
- A master file and the local country file must not be automatically filed with the Swiss federal tax authorities together with the Swiss corporate income tax return, but upon request of the Swiss tax authorities (ie in case they enquire it in light of the tax assessment, tax audit, etc.).
Some risk factors for challenge
- The Swiss tax authorities are actively challenging transfer prices applied.
- Transfer prices are reviewed as part of regular tax audits. They mainly focus on low-risk/low-profit companies of all industries as well as on structures involving offshore tax jurisdictions. Moreover, intellectual property transactions, intercompany financing as well as business restructurings are being challenged.
- There are no formal transfer pricing penalties, but general tax penalty rules apply. Transfer pricing adjustments may give rise to potential instances of the Swiss authorities withholding tax as well as Value Added Tax (VAT) consequences.
Economic analysis and how to demonstrate an arm’s length result
- Benchmarks/comparables must follow OECD transfer pricing guidelines.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- There are no formal APA procedures, however, TP issues are normally ruled with the Swiss tax authorities (equivalent to unilateral APAs). Bilateral and multilateral APAs are available.
- Any intercompany transaction must stand the arm’s length test. There are no thresholds or exemptions to the application of the transfer pricing rules.
Tax authorities and taxpayer behaviour
- The Swiss tax authorities are actively challenging transfer prices applied. The Swiss tax authorities are constantly being trained in transfer pricing. There is no specific transfer pricing taskforce within the Swiss tax authorities, but there is a transfer pricing taskforce/ team within the SIF.
- The SIF represents Switzerland’s interests in financial, monetary and tax matters not only vis-à-vis partner countries but also in the competent international bodies (ie leverage of transfer pricing knowledge with the Swiss tax authorities). It is committed to good framework conditions to ensure that Switzerland can have a secure, competitive and globally recognised financial centre and business location. The State Secretariat is also responsible for implementing the financial market policy of the Federal Council.
- The economic fallout of COVID-19 is likely to have widespread impact and an increase in transfer pricing and tax enquiries. All MNCs should be reviewing their potential exposure to transfer pricing enquiries and updating documentation accordingly.
- It is also likely that the Swiss tax authorities will continue to focus challenges towards companies with low-risk/ low-profit companies of all industries (including 'cost plus' service entities), especially where they are claiming losses because of the pandemic.
- Where supply chains have been disrupted or work brought to a halt due to lockdown measures, expected profits may not eventuate. Comparable companies will often have been affected in the exact same way as multinational groups, but evidence must be gathered and documented contemporaneously.