Monetary benefits in international relations / transfer prices

Case 1: Benefits from group affiliation in the Swiss separation principle

1. facts of the case

The Swiss Group company CH-AG, headquartered in Meilen/ZH, issued a CHF 500 million bond with an interest rate of 3.5% on the Swiss capital market last year. The bond is secured by a guarantee of the French Group parent company F-AG, which gave the bond a rating of "AA". The Company itself normally has a rating of "BBB+" and the overall Group a rating of "AA". For this guarantee, F-AG charges its Swiss subsidiary a guarantee commission of 0.2% (CHF 1 million) per year.

The Cantonal Tax Office of Zurich fully offsets the guarantee commission as part of the audit of the accounts and justifies this by stating that the subsidiary could have financed itself at the same conditions even without this guarantee due to the "implicit group backing".

(Facts adapted from Tax Court Canada (2009) General Electric Capital Canada Inc. v. The Queen).

Questions

- What is meant by the concept of "implicit group retention"?

- Does Art. 58(1)(b) DBG permit offsetting on the basis of benefits from belonging to a group?

- How can the monetary value of the implicit group retention be determined methodically in practice?

Case 2: Transfer of function & procedural law

1. facts of the case

The Swiss Group company A-AG, headquartered in Kreuzlingen/TG, distributes kitchen appliances (e.g. combi steamers) in German-speaking Switzerland for private use on behalf of the German company B-AG and is also responsible for after-sales service (e.g. repairs and replacement of appliances during the five-year warranty period). For this, it is compensated by the German B-AG on the basis of the business case net margin method (TNMM) with a full cost mark-up of 7%.

In calendar year 2018, the German B-AG decides that after-sales service should in future be provided by the German C-AG from Lörrach, which also belongs to the Group. As the Swiss A-AG is no longer responsible for the after-sales service, the full cost surcharge is reduced from previously 7% to 6%. This leads to a profit reduction of CHF 200,000 per year.

The Cantonal Tax Administration Thurgau carries out an audit in spring 2023. Based on the reduced profit, it comes to the conclusion that there is a transfer of functions from A-AG to C-AG and carries out an offset to the extent of the lost capitalized profit (CHF 2 million).

Questions

• What does Swiss profit tax law mean by a "transfer of functions"?

• Can a mere negative transfer pricing adjustment (or reduced profit) be used to infer a transfer of function?

• How can the monetary value of a relocated function be methodically determined in practice?

• The Tax Administration Thurgau insists on the set-off and carries out the assessment. C-AG has already been legally assessed in Germany. How can A-AG defend itself?

In the course of a separate tax audit in Germany, a set-off of EUR 0.5 million is made at B-AG for the financial year 2023 on the grounds that B-AG had provided certain intangible rights to A-AG free of charge. In the meantime, A-AG has been definitively assessed in Switzerland. The Group management decides that A-AG should make a subsequent payment of EUR 0.5 million to B-AG for this.

Question

• What should be taken into account from Switzerland's point of view regarding this corrective compensation payment of EUR 0.5 million?

Case 3: Realistically available options in intercompany transactions

1. facts of the case

A-AG, with its registered office in Baden/AG, produces surgical devices, among other things, in Switzerland and sells them across borders in the European Union (EU). Due to the lack of an institutional agreement (InstA), the EU no longer updates the bilateral Mutual Recognition Agreement (MRA), as a result of which A-AG loses unrestricted access to the EU market.

The management of A-AG reviews various options and decides to establish B-AG in Germany and to sell the surgical equipment business in its entirety to B-AG in calendar year 2022 for CHF 10 million. This transaction benefits A-AG from a tax planning perspective, as it can offset the gain against tax losses of CHF 8 million that would otherwise be forfeited.

In the course of an audit by the Cantonal Tax Administration Aargau, the latter, referring to the OECD transfer pricing guidelines ("realistically available options"), is of the opinion that it would have been financially more attractive for A-AG to license the business to B-AG instead of selling it. It does not accept the one-time compensation of CHF 10 million and adds a fictitious license income of CHF 1 million per year on a recurring basis.

Questions

• What is the formal significance of the OECD Transfer Pricing Guidelines in Swiss profit tax law?

• May the Swiss tax authorities ignore the management's decision to sell the business and correct the transfer prices based on a fictitious fact?

Case 4: Correction of transfer prices outside the bandwidth

1. facts of the case

The Swiss principal company P-AG based in Basel is the sister company of the Indian A-Ltd. which produces antibiotics as a contract manufacturer. A-Ltd. is compensated by P-AG on the basis of a cost-based transfer pricing model with a mark-up of 20%. In the course of an audit of the accounts, the tax administration of Basel-Stadt requests transfer pricing documentation from P-AG for the mark-up of 20%. P-AG replies that it does not have such documentation because Switzerland, unlike other countries, does not have a transfer pricing documentation requirement.

Question

• Is the statement of the P-AG correct?

The Basel-Stadt tax administration has a professional transfer pricing documentation prepared by a third party, which results in a range of 3% (lower quartile) and 15% (upper quartile) with a median of 5%. The tax administration corrects the surcharge of 20% to the median of 5%.

Question

• Is this correction to the median correct?

Case 5: Monetary benefits between permanent establishments

1. facts of the case

The British insurer Insurance Ltd., headquartered in London, has a branch office in Frankfurt and a branch office in Zurich. The branch office in Frankfurt provides underwriting services for the branch office in Zurich, for which a compensation of CHF 10 million p.a. is charged. The Zurich Cantonal Tax Office adjusts the compensation to CHF 3 million with reference to transfer prices.

Questions

• Are the transfer pricing rules applicable to services between branches?
• Can the Swiss branch initiate a mutual agreement procedure under the DTA Switzerland - Germany?

Case 6: Transfer price adjustments due to unilateral abuse provisions

1. facts of the case

The Austrian Group company A-AG pays an arm's length trademark license to the Swiss Group parent company B-AG. Due to the STAF measures, the license is subject to an effective tax burden of 9% in Switzerland. The Austrian tax authorities offset the license in its entirety with reference to Sec. 12 (1) Z 10 KStG ("Lizenzschranke"), as it is not subject to at least 10% taxation at the recipient.

Questions

• Can the group defend itself against this correction with reference to the DBA Switzerland - Austria (assumption: license is undisputedly at arm's length because the B corporation grants an identical license to an independent third party)?

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