Main points
While the Defendant was of the opinion that Companies B and C were not related, upon closer analysis it was clear that Companies A, B and C were indeed related since they indirectly had the same shareholders and there was clear evidence of influence since certain shareholders also acted as members of the Board of Directors of the Defendant. As a result, TP principles were certainly relevant when determining the prices to set in controlled transactions.
In the decision at hand, the SFAC deduced that there is a clear hierarchy when it comes to the application of TP Methods, stating that the CUP method is always to be applied, if possible. Also the court, referring to the SFTA circular dated 19 March 2004, described the C+ method as unsuitable for financial transactions or management functions such as the ones in this case.
Furthermore, the SFAC limited taxpayers’ freedom of choosing a specific TP method, as taxpayers should refer to the hierarchy in place and thus should prioritize the CUP method over the others.
As clearly mentioned in the case, when dealing with the hierarchy of the methods for determining an appropriate third-party price, SFAC confirms that there is no hierarchy when it comes to direct taxes, while in their view there was a clear hierarchy for TP matters.
While such point may have been valid in the past, it is important to highlight that the 2022 OECD TP Guidelines clearly state that “no one [TP] method is suitable in every possible situation, nor is it necessary to prove that a particular method is not suitable under the circumstances.” Therefore, according to this framework, there is no predefined priority for applying one TP method over the others. This guidance has clearly evolved since the OECD Guidelines were first issued but common practice leaves now the selection of the method fully to the taxpayer.
Further, even though SFTA instructs taxpayers to follow the OECD Guidelines, the Guidelines do not override the Swiss national legislation, which has always to be consulted at first. The basis of Swiss TP regulation, found in Art. 58 of the FDTA and Art. 24 of the Federal Tax Harmonization Act (“FTHA”), merely lists the TP Methods introduced by the OECD as such. TP professionals know that the regulation points out that prices must comply with the arm’s length principle, achieved through any of the methods. Therefore, also according to the Swiss legislation, no method is to be prioritized over another.
With regards to the referenced SFTA circular dated 19 March 2004, which is still theoretically applicable, it can be questioned whether such guidance is outdated or viewed as relevant today. Since TP practice has evolved over the years, it is safe to say that the application of the C+ method for financial transactions is no longer viewed as an exception. It has become common practice to apply the C+ method in the financial services industry, albeit it has proven itself to be more suitable for some transactions, such as activities or services that are supportive in nature or which could be easily carved-out for pricing purposes, such as corporate services, certain risk & execution services, distribution support services or financial reporting. Within the Banking & Asset Management industry, in key value activities where a high level of skill is required (i.e. portfolio management, investment advisory, or client relationship management) a profit split of fee-sharing type of policy is regarded as more appropriate than the C+.
The case under review has revealed that TP practitioners always have to keep in mind which norms are to be prioritized over others. It has to be mentioned that as the current Swiss TP regulation follows a more open and flexible approach, additional key regulatory points may be added in order to minimize possible arising doubts and issues. Regardless, TP professionals can deduct from current laws that the taxpayers should comply with one of the methods but the choice of which one to apply remains at their discretion. The only criterion is the suitability with regard to the underlying transaction. In this regard, each intercompany transaction should be properly delineated and functionally analyzed in order to determine which is the preferred method to be applied, considering its nature and economic circumstances.
