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February 29, 2024
2024-0488

Swiss Federal Tax Authorities release practical Q&A guidance on applying transfer pricing rules

  • The Q&A guidance provides helpful examples and welcome clarification on several long-unaddressed transfer pricing topics, including what types of costs are part of the costs basis for intercompany recharges.
  • The Q&A guidance can be viewed as a further confirmation of Swiss tax authorities' efforts to harmonize the application of OECD-based Transfer Pricing Rules in Switzerland.
  • This Tax Alert provides a summary of the key points discussed.
 

On 23 February 2024, the Swiss Federal Tax Authorities (SFTA) released comprehensive guidance in question and answer (Q&A) format on the practical application of transfer pricing rules in Switzerland. The guidance is meant to clarify the application of arm's-length principal and methodologies for assessing arm's-length nature of intercompany transactions between affiliates.

The SFTA's Q&A guidance offers helpful insights and analysis concerning the application of transfer pricing principles in Switzerland, further reinforcing the application of the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) and providing examples of application of specific methods, comparability analysis and the treatment of financial transactions and adjustments within the context of Swiss tax law. This guidance is intended to clarify selected issues and assist companies in complying with transfer pricing regulations, emphasizing the importance of adhering to the arm's-length principle to ensure fair taxation of cross-border intra-group transactions.

A summary of the key points addressed follows.

Comparability analysis

For the cost-plus method, the comparability of the cost base and profit margin with market transactions is crucial. This requires a thorough analysis of the functions, risks, and other relevant factors of the transactions being compared. In practice, the cost-plus method is mostly applied on a net basis (i.e., technically the transactional net margin method is used).

Operating vs. non-operating costs for inclusion in the cost basis

The OECD Guidelines distinguish between operating costs that contribute to a company's value creation activities and should be included in the cost base, and non-operating costs, like taxes and financing costs, which should not be included in the cost basis. This is an important clarification, given inconsistent interpretation observed in specific cases during tax audits, especially at cantonal level.

Treatment of passthrough costs

Passthrough costs related to third-party services should be excluded from the cost base for calculating the cost margin under the cost-plus method. However, according to the OECD Guidelines, to ensure a like-to-like comparison, a comparability analysis must assess whether passthrough costs are included or excluded in the profit indicator of comparable companies.

Simplified approach for assessing arm's-length return for the low-value-added services

A simplified approach of applying a 5% markup is allowed for low-value-added services and is aimed at reducing administrative burden. These services must meet specific criteria to qualify as low-value-added, including being part of a support function or the core business of the group, not involving significant risks and not entailing the use of unique and valuable intangible assets.

Withholding tax on adjustments

The guidance discusses the withholding tax implications of primary, corresponding, and secondary transfer pricing adjustments including the treatment of repatriation payments following a primary adjustment by a foreign tax authority.

Intra-group loans and financial transactions

The guidance also addresses practical considerations concerning intra-group loans, including expectations for transfer pricing analysis on ratings, intra-group interest rates and specific application-related topics, such as treatment and acceptance of prepayment clauses.

Impact of the Altera v. Commissioner decision

The guidance also touches on the tax consequences for Swiss taxpayers of the United States Tax Court's decision in Altera v. Commissioner,1 particularly concerning cost-sharing arrangements (CSAs) and the inclusion of stock-based compensation in the cost base and implications from Swiss standpoint.

While SFTA acknowledges the concept of CSAs, the Q&A guidance stresses the importance of performing case-by-case assessment to understand specific circumstances of each case.

Learn more

To access the original guidance in French and German, please visit: Prix de transfert | AFC (admin.ch).

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Endnote

1 In July 2015, the US Tax Court held in Altera v. Commissioner that the 2003 regulation requiring participants in CSAs to share SBC costs was invalid. In June 2019, the US Court of Appeals for the Ninth Circuit reversed the Tax Court and upheld the 2003 regulation requiring controlled participants to include the cost of SBC in a CSA. In June 2020, the US Supreme Court denied Altera's petition for a writ of certiorari, leaving the Ninth Circuit's decision in place.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young S.A. Geneva

Ernst & Young S.A. Zurich

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
 

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