The TP Paper was published by the SSK, i.e., an association of the 26 cantonal tax authorities jointly with the SFTA. It is therefore important to note that the publication is supported by all Swiss tax administrations, showing that transfer pricing is one of the most important topics at the moment.
The TP Paper exclusively deals with transfer pricing in a cross-border context and is effective as of 1 January 2024.
The TP Paper
The TP Paper discusses the following topics:
- Arm’s length principle – Swiss tax law does generally not provide for specific legislation on transfer pricing outside the scope of VAT. The arm’s length principle is applied on the basis of e.g., Article 58 (1) of the Federal Act on Direct Federal Tax which stipulates the general rules of establishing a company’s taxable profit or – in a treaty context – on double tax treaty provisions based on Article 9 (1) of the OECD-Model Tax Convention. The TP Paper explicitly prescribes that the 2022 OECD Transfer Pricing Guidelines for Multinational Enterprises (the OECD Guidelines) should be referred to for the interpretation of the arm’s length principle in Swiss (cross-border) tax matters. Not complying with the arm’s length principle may result in particular in adjustments to the taxable profit and potential Swiss withholding tax consequences due to the re-characterization of the related party transaction as a deemed dividend.
- Comparability analysis – The TP Paper refers to recent Swiss court cases in which the use of a comparability analysis was emphasized when applying the arm’s length principle. The TP Paper refers to the typical nine-step procedure as outlined in the OECD Guidelines that can be followed when performing a comparability analysis.
- Transfer pricing method – The TP Paper recognises the use of the traditional transaction methods (Comparable Uncontrolled Price Method, Resale Price Method and Cost Plus Method), the transactional profit methods (Transactional Net Margin Method and Transactional Profit Split Method) and other methods and gives further guidance as to when each of the methods is considered an appropriate method.
- Intangible assets – The TP Paper explicitly describes that in a functional analysis, it should be determined which parties perform functions, use assets and assume risks in relation to the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangibles assets. The TP Paper recognises that each member of the group must receive a remuneration that is appropriate to the DEMPE functions they perform.
- Intra-group services – The TP Paper recognises the use of a simplified approach for special intra-group services with low added value. If certain criteria are met, a mark-up of 5% on all relevant costs can be applied, without the need to justify this mark-up through a benchmark.
- Financial transactions – The SFTA publishes safe harbor interest rates on a yearly basis. Taxpayers that want to deviate from the Swiss safe harbor interest rates need to properly substantiate this deviation – e.g., with a benchmark. The TP Paper refers to the use of credit ratings, taking into account any implicit support from the (ultimate) parent company, for determining arm’s length interest rates on intercompany loans.
- Documentation – The TP Paper confirms that other than country-by-country reporting no specific transfer pricing documentation obligations exist for Swiss taxpayers, i.e., no local or master file obligations. However, the TP Paper also emphasises that under Swiss domestic law, the requirement to cooperate with the tax administration may also indirectly require adequate transfer pricing documentation in order to evidence to tax authorities that the pricing of related-party transactions is arm’s length.
Our key takeaways
- Policy statement: The TP Paper is the first comprehensive publication on transfer pricing jointly issued by all Swiss tax authorities. Aside from occasional references to the OECD Guidelines, Swiss tax practice has so far refrained from providing explicit guidance. The latest publication does however not come as a surprise given the fact that many tax authorities have established specialised transfer pricing teams and that transfer pricing is increasingly being challenged in tax audits. The TP Paper should thus not be viewed as change in tax practice but as a clear policy statement.
- Prompting review of transactions and documentation: The TP Paper is a call-to-action for Swiss taxpayers to review existing transactions and respective documentation. For consistency purposes, groups should also verify to what extent they can rely on existing (Swiss or foreign) transfer pricing documentation in order to reduce the administrative burden.
- Link with international developments / Pillar 2: Switzerland – along with almost all EU member states and certain other jurisdictions such as Canada and the UK – has introduced Pillar 2 implementation legislation effective 1 January 2024. Switzerland mainly introduced a domestic top-up tax in the form of a Qualified Domestic Minimum Top-up Tax or QDMTT. As Pillar 2 rules include a transfer pricing correction mechanism, the analysis and pricing of related-party transactions has gained importance in view of the risk of additional top-up tax of up to 15%. This can be particularly important if a transfer pricing adjustment is neutralized due to tax specific measures (e.g., participation reduction) and such event is consequently not mirrored under Pillar 2. In-scope groups therefore face an incentive to improve upon transfer pricing reviews.
- Safe harbor interest rates: Swiss safe harbor interest rates (recently published for the 2024 fiscal year) are a tool to reduce administrative burden by ensuring acceptance of the pricing for related-party financing arrangements without the need of a benchmark. However, Groups in scope of Pillar 2 may increasingly have to ensure through benchmark analyses (possibly secured by advance tax rulings) that the utilization of unilateral safe harbors indeed results in an arm's length outcome.
- Unilateral and bilateral APAs / advance tax rulings: It can be expected that the increased need for transfer pricing review and benchmarking may also increase the focus on advance confirmations to obtain legal certainty. In practice, Swiss tax authorities may request secondary benchmarks (e.g., through a TNMM approach) to improve comfort on a proposed pricing. Swiss taxpayers are always best advised to approach both cantonal and federal tax authorities jointly and in a transparent manner as this may speed up the process significantly.