The TPQ&A clarifies the importance of both the cost base and the profit mark-up. It refers to the existing circulars regarding application of the cost plus method and their explicit reliance on the OECDTPG, with specific reference to the latest version published in January 2022.
Operating costs are deemed to add value to business functioning and provision of a given service and should therefore be part of the cost base. Non-operating costs such as taxes and financing costs should in principle be excluded from the cost base since they do not typically create value for the business. However, this should not be taken for granted without having considered the specific facts and circumstances of the service provider or producer of goods. For instance, while excluding financing costs would make sense for a routine service provider, when it comes to capital-intense industry players the role of capital (and thus financing costs) might be linked with the value creation for the business and the service provided or product sold. In such cases, financing costs might typically be booked as operating costs. In contrast, for tax purposes, the theoretical background is clear and emphasized by the SFTA. In practice, though, some cantons have generally insisted on adding tax expenses to the cost base.
Pass-through costs related to third-party services should be excluded from the cost base when the profit mark-up is applied. There is a general understanding that pass-through costs are just external costs that should be allocated without applying profit mark-up. Chapter II paragraph 2.99 of the OECDTPG defines them as “costs which are potentially excludable from the denominator of the net profit indicator”. In other words, the OECDTPG sees pass-through costs as those subject to allocation but potentially not part of the cost base to which the profit mark-up is applied. It is important to point out that the OECDTPG do not deem it sufficient to classify costs as “internal” or “external” for the sake of ascertaining the appropriateness of a profit mark-up. A comparability analysis might be helpful in such situations, but can prove difficult due to lack of information (e.g., absence of cost breakdown). Finally, the same treatment should be sought to pass-through costs in the context of the simplified determination of arm’s length charges for low value-adding intragroup services.
In this sense, the TPQ&A confirms the simplified charge mechanism for low value-adding intragroup services previously set out in section 5.3 of the Swiss Transfer Pricing Guidance and is fully in line with paragraphs 7.43 to 7.65 OECDTPG. This simplified method allows companies to directly charge a 5% profit mark-up and therefore reduce the compliance burden and provide certainty to taxpayers while facilitating the review to the tax authorities. The conditions for the intragroup services to be considered low value-adding in nature are essentially the same in both the TPQ&A and the OECDTPG (paragraph 7.45). However, the TPQ&A explicitly states that such conditions need to be cumulative; this is only implied by the OECDTPG.
The administrative relief for low value-adding services are listed in line with the OECD, which the TPQ&A refers to directly.
Q&A 10 to 16: Withholding tax
Swiss withholding tax is assessed in the context of primary, corresponding and secondary adjustments. The TPQ&As on primary adjustment fully mirror the relevant section 7.3.1 of the Swiss Tax Guidance, comprising the OECD definition and one illustrative example. It confirms that the cantonal tax authorities are competent insofar as the taxpayer is subject to income tax. The corresponding adjustment is also covered in line with the Swiss Tax Guidance.
The TPQ&A also covers an item not included in the Swiss Transfer Pricing Guidance: repatriation. It states its non-binding nature from treaty and domestic law perspective. The repatriation is the payment made to match the balance sheet following a primary adjustment and is covered by the OECD in section 4.77 and 4.78. Due to limited experience of most OECD members, it is recommended that repatriation occur in mutual agreement proceeding (MAP) initiated for the related primary adjustment. The TPQ&A refers to Swiss law, under which repatriations are not considered as cash benefits, and withholding tax might not be levied in the context of a MAP or internal agreement. However, outside the context of such a procedure/agreement withholding tax might be levied.
Secondary adjustment is introduced by the TPQ&A following the definition of the Swiss Transfer Pricing Guidance in section 7.3.2 on procedural aspects, which in turn follows the definition provided by the OECD by reference to paragraph 2 of article 9 of the OECD Model Tax Convention. Likewise, the TPQ&A confirms that the SFTA has competence for secondary adjustment when dealing with withholding tax. The TPQ&A expands further on the practice developed by Swiss tax authorities for secondary adjustments where a MAP is opened after a primary adjustment has been made. The TPQ&A contains an example and sets out the conditions to avoid such secondary adjustment.
The interplay between primary and secondary adjustments in the context of MAPs involves a foreign tax authority dealing with the State Secretariat of International Finance (SIF), which has the exclusive authority to negotiate the MAP, the cantonal tax authorities dealing with income tax (primary adjustment) and potentially the SFTA for withholding tax purposes (secondary adjustment). Both the Swiss Transfer Pricing Guidance and the TPQ&A devote several sections to this subject as do occasional articles published by the SFTA. This is certainly a topic where we can expect more detail in the TPQ&A soon.
