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Policy, trends and developments

Government policy

Describe the general government/regulatory policy for transfer pricing in your jurisdiction. To what extent is the arm’s-length principle followed?

Switzerland has implemented no unilateral transfer pricing guidelines. Instead, the Organisation for Economic Cooperation and Development (OECD) Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations are applied directly. The Swiss Federal Tax Administration and the cantonal tax administrations thus follow the arm’s-length principle. While transfer pricing documentation is not required by Swiss tax law (except for the OECD Country-by-Country Report, in the case of a tax audit or if the competent tax administrations ask for such information during the tax assessment process, taxpayers must demonstrate that the prices used in transactions with related parties are in line with the arm’s-length principle.

Trends and developments

Have there been any notable recent trends or developments concerning transfer pricing in your jurisdiction, including any regulatory changes or case law?

As Switzerland applies the OECD Transfer Pricing Guidelines directly, any changes to these may lead to immediate changes in administrative practice. In addition, the international discussion on base erosion and profit shifting (BEPS) has led to an increased awareness with regard to transfer pricing among the cantonal tax administrations and Swiss tax commissioners have begun investigating related party transactions in more detail.

Finally, Switzerland:

  • has agreed to implement the BEPS minimum standards of the G20 countries and the OECD, and has consequently signed the Multilateral Competent Authority Agreement for the Automatic Exchange of Country-by-Country Reports and the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent BEPS;
  • partakes in the spontaneous exchange of information on tax rulings;
  • grants access to the Mutual Agreement Procedure; and
  • includes principal purpose clauses in double taxation treaties.

Domestic legislation with regard to country-by-country reports and the spontaneous exchange of information on tax rulings has already entered into force.

Legal framework

Domestic legislation and applicability

What primary and secondary legislation governs transfer pricing in your jurisdiction?

Switzerland is a federal state with 26 cantons. The legislative and administrative powers regarding taxation are distributed between federal and cantonal parliaments and tax administrations. While the cantonal tax administrations are competent with regard to corporate income taxes (including the tax assessment of federal corporate income tax), the Swiss Federal Tax Administration (FTA) is the competent authority with regard to withholding taxes, stamp duty and value added tax (VAT).

Primary legislation

Swiss tax law includes no general, explicit definition of ‘related parties’ or the ‘arm’s-length’ principle and its application to related party transactions.

Corporate income tax With regard to corporate income tax, according to case law and administrative practice, Articles 58 and 60 of the Federal Direct Tax Act 1990 and Article 24(1) of the Federal Tax Harmonisation Act 1990 form the legal basis for the application of the arm’s-length principle.

Constructive dividends and hidden capital contribution Profits realised due to inadequate transfer prices by a shareholder or related entity may be qualified as constructive dividends and, pursuant to Article 4(1)(b) of the Federal Withholding Tax Act 1965, lead to withholding tax consequences. Conversely, pursuant to Article 5(2)(a) of the Federal Act on Stamp Duty 1973, transfer prices to the inadequate benefit of a direct subsidiary of a parent company may be classified as hidden capital contribution and therefore result in stamp duty consequences.

VAT Regarding VAT, Article 24(2) of the Federal VAT Act 2009 defines the principle of dealing at arm’s length and Article 3(h) of the act defines the term ‘related parties’ for VAT purposes.

To date, no Swiss canton has implemented transfer pricing legislation in its local tax laws.

Secondary legislation Switzerland has agreed to apply the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines. As Swiss tax law provides no country-specific transfer pricing legislation, the FTA instructed the cantonal tax administrations to apply the guidelines directly via a circular letter published in 1997 and renewed in 2004. Therefore, Switzerland relies on the OECD guidelines directly for the definition of the ‘arm’s-length’ principle and the determination of arm’s-length prices.

In addition, the FTA has published a number of administrative directives addressing a few specific topics, including safe harbour rules with regard to thin capitalisation and safe harbour interest rates.

To date, the local cantonal tax administrations have issued no directives on transfer pricing.

Are there any industry-specific transfer pricing regulations?

No.

What transactions are subject to transfer pricing rules?

In principle, all related party transactions are subject to transfer pricing rules.

How are ‘related/associated parties’ legally defined for transfer pricing purposes?

The law on direct taxes includes no definition of ‘related/associated parties’. Consequently, the Federal Supreme Court has defined the term in case law as entities with close commercial or personal relationships. In line with this definition, it is decisive whether the transaction in question was conducted under the given conditions because of a relationship between the parties involved or whether the transaction could also have taken place between independent parties. Thus, from a tax law perspective, the direct or indirect control of management or capital of one involved party over the others is not required for the assumption of an inadequate related party transaction.

Are any safe harbours available?

The FTA has defined safe haven rules with regard to interest payments on loans between related parties and with regard to thin capitalisation.

Regulators

Which government bodies regulate transfer pricing and what is the extent of their powers?

No specific government body regulates transfer pricing and because the OECD Transfer Pricing Guidelines have not been translated into domestic law, the relevant competent tax administration applies them directly to the respective case. In addition, the definition of ‘arm’s-length prices’ involves considerable discretionary scope; therefore, the tax administration in charge of the respective tax assessment, audit or advance Swiss tax ruling request possesses considerable discretionary power.

With regard to corporate income tax, the cantonal tax administration is in charge of:

  • tax assessments;
  • tax audits; and
  • potential advance Swiss tax ruling requests.

The FTA is in charge of:

  • withholding tax;
  • stamp duty; and
  • VAT matters.

The cantonal tax administration competent for corporate income tax matters may not reach the same conclusion as the FTA which has the competency, for example, to requalify inadequately realised profits as constructive dividends in withholding tax matters and vice versa.

In addition, the FTA has a supervisory function over the cantonal tax administrations’ assessment of federal income tax. Consequently, the FTA issues administrative directives with regard to federal income taxes (eg, the circular on the safe haven rules in connection with thin capitalisation). Often the respective cantons base their decisions concerning cantonal taxes on the FTA’s directives, even though they are not legally bound to do so.

The State Secretariat for International Finance is the competent authority with regard to bilateral and multilateral advance pricing agreements between Switzerland and other countries.

Finally, depending on the canton, the tax administrations of the municipalities may have the power to define transfer prices with regard to municipal taxes (eg, real estate gains tax and real estate transfer tax).

International agreements

Which international transfer pricing agreements has your jurisdiction signed?

Switzerland has agreed to apply the OECD Transfer Pricing Guidelines and has signed numerous double taxation treaties and tax information exchange agreements. For the complete list as of September 1 2017, please see here.

Finally, Switzerland:

  • has agreed to implement the base erosion and profit shifting (BEPS) minimum standards of the G20 countries and the OECD, and has consequently signed the Multilateral Competent Authority Agreement for Automatic Exchange of Country-by-Country Reports and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS;
  • partakes in the spontaneous exchange of information on tax rulings;
  • grants access to the Mutual Agreement Procedure; and
  • includes principal purpose clauses in double taxation treaties.

Domestic legislation with regard to country-by-country reports and the spontaneous exchange of information on tax rulings has already entered into force.

To what extent does your jurisdiction follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines?

Switzerland has agreed to apply the OECD Transfer Pricing Guidelines, but has not implemented them into tax law. Therefore, the competent tax administrations apply the guidelines directly.

Transfer pricing methods

Available methods

Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?

Swiss tax law prescribes the use of no specific transfer pricing methods. Therefore, any of the methods described in the Organisation for Economic Cooperation and Development Transfer Pricing Guidelines can be used.

Preferred methods and restrictions

Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?

Neither Swiss tax law nor case law or practice define a hierarchy of methods. Instead, the most appropriate method should be used.

Comparability analysis

What rules, standards and best practices should be considered when undertaking a comparability analysis?

There are no country-specific standards or best practices to be considered when undertaking comparability analysis.

Special considerations

Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?

No.

Documentation and reporting

Rules and procedures

What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?

Switzerland has signed the Multilateral Competent Authority Agreement for the Automatic Exchange of Country-by-Country Reports. Consequently, Swiss ultimate parent entities and surrogate parent entities with a group revenue exceeding Sfr900 million must file an annual country-by-country report. The corresponding law and ordinance entered into force on December 1 2017. Consequently, as of 2018, qualifying Swiss entities are required by law to file country-by-country reports on an annual basis. The deadline for filing the report is 12 months after the end of the respective business year (Article 11 of the Country-by-Country Law).

Aside from the country-by-country report, Swiss law does not require Swiss entities to compile transfer pricing documentation. However, if the competent tax administration questions the arm’s-length comparability of a transaction, the respective entity may be required to provide conclusive proof for the relevant transaction to be at arm’s length.

Content requirements

What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?

The law requires only country-by-country reports to be filed. Neither master nor local-files are mandatory.

Penalties

What are the penalties for non-compliance with documentation and reporting requirements?

The law on country-by-country reporting provides penalties for non-filing, incorrect filing and late filing of reports, violation of the registration obligation and general non-compliance with the orders of the Swiss Federal Tax Administration. In the case of an intentional offence, the fine may amount to a maximum of Sfr250,000 (Article 24 of the Country-by-Country Reporting Law).

Best practices

What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?

Aside from the country-by-country report, the law does not require Swiss entities to compile transfer pricing documentation.

Advance pricing agreements

Availability and eligibility

Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?

Domestic tax law does not provide for specific advance pricing agreements; however, it is common practice to apply for advance Swiss tax rulings. These rulings contain a description of the facts (eg, a mechanism determining the transfer prices between related parties that is to be implemented and the resulting tax consequences). They may be limited to the application of tax law or an administrative directive on a specific case, or rule the determination of the tax basis. Such rulings are usually requested from a single tax administration. However, all tax consequences of a specific case are often formulated in one ruling request, which is subsequently filed with all of the relevant tax administrations. 

In addition, a bilateral or multilateral advance pricing agreement can be applied for through the State Secretariat for International Finance (SIF). This process is generally more time consuming than the unilateral process; therefore, unless initiated by foreign tax authorities, few cases occur. Taxpayers usually negotiate separately with the tax administrations involved. However, in light of recent international developments in relation to the G20 and Organisation for Economic Cooperation and Development initiative to combat base erosion and profit shifting (BEPS), this option is likely to become more popular.

Rules and procedures

What rules and procedures apply to advance pricing agreements?

In order to obtain an advance Swiss tax ruling, a case write-up along with the tax consequences must be filed with the competent tax administrations. If the description of the facts is precise and the legal questions involved are fairly standard, the tax commissioner may agree immediately and return a signed version of the filed ruling request. If the facts or the legal questions are complex, calls or personal meetings may be required to sort out the differences.

In transfer pricing cases, a minimum of two rulings are generally required. First, a ruling determining the withholding tax or stamp duty consequences is requested from the Swiss Federal Tax Administration (FTA). Second, a ruling determining the corporate income tax consequences is requested from the competent cantonal tax administrations.

A ruling with the competent tax administrations will be binding if:

  • it is granted before the facts described in it are implemented;
  • the description of the facts is specific and the implementation is strictly in line with the description in the ruling;
  • it is filed with and granted by the competent tax administration (eg, the FTA and the relevant cantonal tax administration if withholding taxes and corporate income taxes are to be covered);
  • it contains no obvious mistakes;
  • the taxpayer concerned has taken measures which, on reversal, would result in considerable inconvenience; and
  • it remains valid for as long as there is no change in law.

Bilateral or multilateral advance pricing agreements that are to be negotiated through the SIF follow the same principles.

Timeframes

How long does it typically take to conclude an advance pricing agreement?

The timeframe required to receive an advance Swiss tax ruling depends on the tax administrations that need to be contacted and the complexity of the facts and legal questions involved. In practice, it may take anything from a few days to several months to receive a legally binding ruling.

With regard to bilateral or multilateral advance pricing agreements that are to be negotiated through the SIF, a timeframe cannot be estimated. Depending on the difficulty of the international negotiations, the process may take a considerable amount of time.

What is the typical duration of an advance pricing agreement?

The law does not define the duration of advance Swiss tax rulings. In practice, rulings are often either without a limited timeframe or last for three years. However, rulings remain valid only for as long as the actual facts are in line with the facts disclosed in them and the relevant law does not change.

Fees

What fees apply to requests for advance pricing agreements?

The FTA charges no fees for advance Swiss tax rulings. However, certain cantons levy fees. These relate to the work required and are not defined as a percentage of the transaction amount (ie, they are generally negligible).

In addition, the SIF levies no fees on the negotiation of bilateral or multilateral advance pricing agreements.

Special considerations

Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?

It is common practice to apply for advance Swiss tax rulings and a considerable advantage to receive a legally binding answer on the tax consequences of implementing, for example, a system of transfer prices in advance. However, as of 2018, Switzerland will take part in the international spontaneous exchange of information on tax rulings (Article 5(ff) of the Ordinance on the Administrative Assistance in Tax Matters 2016). Before applying for a ruling, taxpayers should clarify whether it will be subject to the international ruling exchange. On the one hand, rulings on transfer prices may include confidential information and the international exchange of information may pose certain risks. On the other hand, the rulings themselves are not exchanged and the information that is subject to the exchange is expected to be of a general nature (ie, sufficient for the receiving tax authority to assess whether further investigation is required).  

The above also applies to bilateral or multilateral advance pricing agreements that are negotiated through the SIF.

Review and adjustments

Review and audit

What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?

Swiss tax law includes no domestic legislation on transfer pricing. Therefore, there are no specific rules, standards or procedures with regard to the tax authorities’ review of companies’ compliance with transfer pricing rules. Instead, the competent tax authorities may review companies’ transfer pricing compliance as part of the regular tax compliance review process (eg, analysing the arm’s-length comparability of related party transactions and requesting additional information during the tax assessment process or audits).

In principle, the taxpayer has the burden of proof regarding tax-reducing facts and the tax administrations have the burden of proof regarding tax-increasing facts. However, taxpayers are subject to an obligation to cooperate with the tax administrations and provide them with all of the information necessary for an accurate tax assessment.

Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?

There are no specific transfer pricing audits in Switzerland. The regular rules on tax audits – which depend on the type of tax concerned – apply.

Penalties

What penalties may be imposed for non-compliance with transfer pricing rules?

Aside from the penalties for non-compliance with the country-by-country reporting obligations, there are no specific penalties for failing to comply with transfer pricing rules in Switzerland. Instead, the regular offences and respective penalties as defined in the tax act governing the type of tax concerned apply. Such penalties include fines for:

  • non-compliance with the obligation to cooperate with the tax authorities;
  • failing to file tax returns within the prescribed timeframe; and
  • tax evasion.

In addition, severe tax fraud may be punishable by imprisonment.

Adjustments

What rules and restrictions govern transfer pricing adjustments by the tax authorities?

The tax administrations may conclude that certain transactions between related parties are not at arm’s length in any tax assessment process or audit. The statute of limitation depends on the type of tax concerned.

Challenge

How can parties challenge adjustment decisions by the tax authorities?

Adjustment decisions can be appealed before the courts. At first instance, the decision is appealed before the tax administration that issued the decision. This may be followed by two or three independent court decisions, depending on the type of tax and the canton concerned. The final-instance decision is issued by the Federal Supreme Court.

Mutual agreement procedures

What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?

The Constitution prohibits double taxation in Switzerland. If the relevant cantons fail to agree on the right of taxation (eg, because they do not agree on transfer prices), tax decisions can be appealed before the court. Appeals must be brought through the courts in at least one canton before the Federal Supreme Court issues the final decision and attributes the right of taxation to one of the cantons.

On an international level, if Switzerland has a double taxation agreement with the relevant countries in force, a mutual agreement procedure can be initiated. In Switzerland, the State Secretariat for International Finance (SIF) has the authority to approach if a taxpayer decides to initiate a mutual agreement procedure. Since the procedure does not bind the negotiating parties to conclude the negotiation with an agreement, it is not always successful at avoiding double taxation. Therefore, Switzerland generally seeks to include arbitration clauses in its double taxation agreements and newly negotiated double taxation agreements (as of 2010) generally include an arbitration clause. The arbitration procedure can be initiated if the mutual agreement procedure ends unsuccessfully.

Anti-avoidance framework

Regulation

What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?

Swiss tax law includes clauses directed against abusive tax avoidance. The tax administrations may disregard a set-up for tax purposes if it:

  • has been chosen for the sole purpose of tax avoidance;
  • appears to be strange and to disregard any economic reasoning; and
  • results in an actual reduction of taxes in comparison to an ordinary set-up.

Instead, the tax administrations generally base their tax assessment on the economical substance, rather than the chosen legal form of a given structure and contracts. Case law and administrative practice have developed against various specific structuring variants targeted at tax avoidance. To improve legal certainty, some frequent issues and their underlying facts have been included in the tax laws. Others are merely addressed in case law and administrative practice.

In addition, Switzerland takes part in the spontaneous exchange of information on advance tax rulings, which will affect advance Swiss tax rulings in place from January 1 2018 and in the exchange of country-by-country reports.

To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?

Switzerland has agreed to implement the base erosion and profit shifting (BEPS) minimum standards. The effects of this agreement are as follows:

  • Switzerland is expected to abolish tax regimes regarded as harmful under BEPS (eg, the mixed company status and holding company status) within the next few years.
  • Switzerland is taking part in the spontaneous exchange of information on advance tax rulings.
  • Switzerland has signed the Multilateral Competent Authority Agreement for the Automatic Exchange of Country-by-Country Reports and the companies concerned are to file mandatory country-by-country reports as of the reporting period beginning in 2018.
  • Newly signed double taxation agreements are expected to include a principal purpose clause and an arbitration clause.

However, Switzerland is unlikely to exceed the BEPS minimum standards. For example, master and local-files are not expected to be introduced.

In order to mitigate the effect of abolishing specific tax regimes regarded as harmful under BEPS, Switzerland is likely to introduce new regimes that are in line with BEPS (eg, tax cuts on intellectual property, in particular the Patent Box and R&D super-deductions). However, the first attempt at such legislation under the project name Tax Reform III has not passed the popular vote. A new project with similar targets called Tax Proposal 17 has since been launched.

Is there a legal distinction between aggressive tax planning and tax avoidance?

In principle, the law does not distinguish between aggressive tax planning and tax avoidance. Instead, the Federal Supreme Court has developed a well-established court practice on the basis of which any unnatural set-up that is not economically justified, but was implemented with the sole purpose of reducing the tax burden and led to a reduction in the tax burden, can be disregarded by the competent tax administrations. While this provision is likely to be applicable in a case of tax avoidance, it may also be applicable in a case of aggressive tax planning. However, the expressions as such are not used in the tax law.

Penalties

What penalties are imposed for non-compliance with anti-avoidance provisions?

Generally, non-compliance with anti-tax avoidance provisions will not result in penalties for the taxpayer. Instead, in a case of unlawful tax avoidance, the facts are corrected, the taxes due are recalculated and a new tax bill is issued. In addition, interests for late payment of the taxes are due.

However, penalties may be issued:

  • if taxpayers do not disclose all of the facts relevant for a tax assessment in the relevant tax return;
  • for so-called ‘wilful’ or ‘negligent’ tax evasion; and
  • in the case of tax fraud.

Tax fraud may be assumed if, in connection with inadequate transfer prices, the annual reports filed with the competent tax administration are not in line with the Swiss Code of Obligations