After publishing a summary on transfer pricing rules in Switzerland (TP Paper), the SFTA has now published a website notably including a rather extensive Q&A on selected Swiss transfer pricing topics.

The Q&A notably pertains to (1) the determination of the cost basis for cost plus arrangements, (2) secondary adjustments and the related Swiss (dividend) withholding tax consequences, (3) a special note on the impact of the Altera case on cost-sharing arrangements involving Swiss businesses and (4) intercompany financial transactions.

The Q&A notably highlights a few important aspects which routinely create issues or misunderstandings in Swiss TP audits:

  • Cost basis for cost plus arrangements: The Q&A confirms that non-operating expenses such as tax and financing expenses as well as pass-through expenses are to be excluded from the basis of a cost plus calculation. Although already confirmed in the OECD TP Guidelines, the fact taxes are a tax-deductible expense in Switzerland often lead to the inclusion of tax expenses in the cost basis (thus ultimately arriving at a net margin approach instead of a cost plus). Also, the clear statement on pass-through expenses is a welcome guidance from a practical perspective.
  • Secondary adjustments: Switzerland levies both corporate income tax and withholding tax (WHT) in case of transfer pricing corrections. The secondary adjustment pertains to the withholding tax angle as Switzerland generally levies WHT on the transfer of profit to align the primary and corresponding adjustments with the Swiss statutory accounts. Pursuant to new legislation in Switzerland, the secondary adjustment does not trigger withholding tax if it is included in a mutual agreement procedure (MAP) agreement. Failure to include WHT in a MAP would thus in principle result in WHT being levied (unless such tax would be reduced in full or part under existing rules).
  • Cost sharing arrangements: A cost sharing arrangement is the willingness of parties involved to share the costs, risks and benefits of developing one or more intangibles assets. In the Altera case, the US tax court ruled that stock-based compensation of employees performing cost sharing arrangement-related activities must be included in the cost basis. As a result, Swiss taxpayers that enter into a cost sharing arrangement must include stock-based compensation to the shared cost base, resulting in a decrease of the value of a developed asset.

  • Intercompany financial transactions: The Q&A confirms that non-compliance with Swiss “safe harbour” interest rates ultimately must be demonstrated with a transfer pricing study. Furthermore, the choice of the currency of a loan should be assessed on a case-by-case basis. The Q&A gives some examples that justify the use of foreign currencies, such as, the foreign currency is the company’s functional currency and the foreign currency is the currency of the main income resulting from the use of an asset financed by the loan. The Q&A indicates that a credit rating of a borrower obtained from an independent rating agency is preferred opposed to the use of own financial software. Furthermore, implicit support of the group must be taken into account when determining the creditworthiness of the borrower.

The Q&A can be read on the SFTA's website and is currently available in German and French It emphasizes the importance of transfer pricing aspects in all Swiss tax matters and the high likelihood of challenges in tax audits going forward.