New Swiss transfer pricing guidance

Additional guidance offers insights into the treatment of transfer pricing adjustments in Switzerland and their tax impact.

In brief

• The Swiss Federal Tax Administration launched a portal to elaborate on key transfer pricing topics recently published in their new Swiss Transfer Pricing Guidance.  
• One of the topics covered in the Q&A is the impact of different transfer pricing adjustments on income and withholding taxes in Switzerland.
• This article also provides insights into the mutual agreement procedure in Switzerland, the appropriate context under which transfer pricing adjustments occur.

In today’s global economy, many corporations operate across multiple tax jurisdictions, which exposes them to the potential for transfer pricing controversy and a risk of double taxation. In the recently published Swiss Transfer Pricing (TP) Guidance, and subsequent TP Q&A, the Swiss Federal Tax Administration (SFTA)[i] provides welcome guidance on various topics, including the treatment of primary adjustments, corresponding adjustments and the mutual agreement procedure (MAP) in Switzerland as well as secondary adjustments and their interplay with Swiss withholding tax.

In this article, we summarize the concepts of TP adjustments in Switzerland, their effects on income and withholding taxes as well as the MAP procedure in Switzerland.

Primary adjustments

From the perspective of the jurisdiction where the payment is made, this implies that the relevant tax authority does not agree with the price charged on the transaction between the two associated entities (i.e., the price is too high). The tax authority argues that said price does not correspond to one that would have been set between two independent parties and, hence, is not at arm’s length. Based on the tax authority’s assessment, a primary adjustment is made, increasing the entity’s taxable profit (affecting its tax balance sheet only).

In Switzerland, the cantonal tax authorities are the competent authorities to make primary adjustments as they are responsible for the collection of income taxes.

Corresponding adjustments

In many cases, a primary adjustment by the relevant tax authority in a first country is followed by a corresponding adjustment in a second country. 

The purpose of the corresponding adjustment is to balance the effect of the primary adjustment in the first country by counter-adjusting the taxable income in the second country, thus avoiding double taxation. Notably, a corresponding adjustment presupposes that the primary adjustment enacted by the first country is indeed accepted by the second country’s responsible tax authority. In practice, corresponding adjustments are mostly performed as part of a MAP.

Similarly to the primary adjustments, the cantonal tax authorities are responsible for the granting of corresponding adjustments in Switzerland, again due to their competence in the collection of income taxes.

From a timing perspective, corresponding adjustments usually occur once a Swiss (federal and/or cantonal) taxation decision (assessment) has become legally binding. At the federal as well as at the cantonal levels, a legally binding taxation decision may only be revised in certain strictly defined cases, most notably upon the discovery of new significant facts or crucial evidence. While some Swiss cantons may accept the mere existence of a primary adjustment as a fact meeting the newness and significance thresholds of the revision procedure, at the federal level and in most cantons, a MAP must have been concluded before a corresponding adjustment can be granted. Only the mutual agreement, reached upon completion of the procedure, will allow for a revision of a legally binding taxation decision.

Repatriation

The OECD Guidelines acknowledge in their 2022 version that most of the OECD’s member countries have not yet had much experience with repatriation. For that reason, the guidelines recommend that agreements made between taxpayers and tax administrations regarding repatriation be discussed in the MAP initiated in relation with the primary adjustment. The SFTA elaborates on the repatriation of profits between associated entities following primary and corresponding adjustments. It is important to note that both primary and secondary adjustments merely change the taxable income per an entity’s tax balance sheet, while repatriating profits from one group entity to the other aligns each entity’s commercial balance sheet with their respective tax balance sheet. The repatriation of profits in connection with primary and corresponding adjustments is not mandatory in Switzerland; however, it may lead to the SFTA making a secondary adjustment. This will be discussed in more detail in the section below.

Secondary adjustment

As concluded above, the goal of primary and corresponding adjustments is to correct the income tax positions of two associated entities, to ultimately ensure that intercompany transactions are priced at arm’s length and that double taxation is prevented. In addition to these adjustments, a secondary adjustment can be imposed by the relevant tax authority. In a secondary adjustment, a secondary transaction is recognized with potential tax implications. 

Comparing the timelines of remitting withholding tax and meeting the requirements for a waiver of the same, a mismatch is readily apparent: at the time withholding tax would need to be paid, it will likely not yet be clear whether the relevant conditions for the waiver will be met.

In order to avoid the administrative burden of remitting withholding tax and the SFTA potentially having to repay that tax, the SFTA recommends that taxpayers proactively reach out and inform them about any plans to initiate a MAP. The SFTA will refrain from levying any withholding taxes until such time as the MAP is concluded. Should no MAP be initiated, it fails to be concluded or not set out that no Swiss withholding tax should be levied (the latter is considered highly unlikely in modern MAPs), withholding tax would become due and the late payment interest consequences outlined above would apply.

Spotlight on the mutual agreement procedure (MAP) in Switzerland

The OECD defines MAPs as “a means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. [...] this procedure can be used to eliminate double taxations that could arise from a transfer pricing adjustment.” The aim of a MAP is to prevent or address non-compliant taxation. In Switzerland, the State Secretariat for International Finance (SIF) is the authority overseeing MAPs. Both individuals and entities can request a MAP if they believe they are, or will be, subject to taxation that is not in alignment with an applicable (international) tax treaty.

To initiate a MAP, applicants must submit a detailed request including evidentiary documentation to the SIF in writing, in one of Switzerland’s official languages or English. The SIF is not obligated to accept an applicant’s request if certain standards, such as a complete and clear application, are not met. Notably, the application for a MAP as well as the MAP process itself are free of cost in Switzerland.

Once the MAP request has been accepted, the applicant is no longer a party to the MAP process. Whereas the applicant remains obligated to provide any necessary information and documentation to the SIF, the applicant has no access to files or ongoing discussions with other relevant parties. The SIF may, however, provide information to the applicant throughout the process, provided that this is possible pursuant to the applicable tax treaty.

The MAP process concludes once the parties (i.e., all relevant tax authorities in Switzerland and the second country as well as the SIF) have reached a mutual agreement. If the mutual agreement is to be implemented in Switzerland, it becomes legally binding once the concerned person (taxpayer) consents to it. By consenting, all legal remedies in connection with the subject matter covered in the mutual agreement are waived and any legal action already taken by the taxpayer must be withdrawn. Finally, the SIF will communicate the agreement to the relevant Swiss tax authorities who will enforce it ex officio.

There are currently around 500-600 MAPs pending in Switzerland, the majority of which relate to primary adjustments made by a non-Swiss tax authority. The MAP process may take several months to conclude (maximum of 24 months), although a final agreement may be reached more quickly in clear cases.

A Swiss domestic agreement may bear fruit in a more timely manner, whilst providing similar benefits to the taxpayer. Notably, in Switzerland MAPs are treated equally in terms of urgency to other procedures such as advanced pricing agreement (APA), whereas other jurisdictions may prioritize one or the other.

The OECD Guidelines acknowledge the importance given on Action 14 of the BEPS Action Plan to facilitating and having readily accessible guidance on applicable procedures (MAPs). As a result, the SFTA provides specific guidance on MAPs in the new Swiss TP guidance, expanded by the subsequent Q&As and publishes regularly subject matter articles.