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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 during tax assessment or tax audit procedures. 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). Taxpayers can also request tax adjustments in response to initial adjustments by foreign tax authorities that can be easily integrated in the tax assessment procedure if the initial adjustment is accepted by the competent Swiss tax authority. After the final assessment of a tax period, an adjustment can be granted only under certain legally defined conditions. The award of a mutual agreement procedure should be considered a sufficient reason to allow an adjustment.
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.
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.
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.
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 between cantons 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 or the right of taxation can be determined in certain cases by the Federal Tax Administration. 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 has the relevant authority 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.
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