globaltaxnews.ey.comSign up for tax alert emailsPrintDownload

29 February 2024

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).

* * * * * * * * * *
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.

* * * * * * * * * *
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

Document ID: 2024-0488

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.

 


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or ey.com. Please refer to the privacy notice/policy on these sites for more information.


Yes, I accept         Find out more