VAT (indirect taxes) and transfer prices

Case Holding

The US biotech group "Flexymusc Inc" (FLEXYMUSC) has a Swiss sub-holding company. This company is responsible for holding the investments of the Rest of World business of FLEXYMUSC, Zug, under the number CHE- 069.069.069. It was not registered for VAT purposes, as the input tax paid annually only ever fluctuated between CHF 15,000 - 30,000 and therefore registration was waived for economic reasons. The holding company has a principal company as a 100% owned subsidiary in Zug. The holding company has no staff of its own. The holding company is managed by a management company in Ireland and was not included in a transfer pricing concept as the activity fell through a de minimis grid of the FLEXYMUSC Group.

The balance sheet of the holding company shows the following balance sheet data on book values and income statement figures (in CHF)

Variant: The holding company has its own staff, i.e. it has a lawyer, 60% of whom does everyday work for the holding company on a part-time basis.

Questions

• How is the situation with regard to purchased management services for the holding company to be assessed against the background of Art. 24 (2) MWSTG?
• Ditto: When using the variant?
• What are the risks and how can the risks be minimized in the future with the simplest means?
• Can the preparation of a transfer pricing study on the administrative services received improve the situation of the holding company? Which transfer pricing concept would be conceivable here?

Case Intra-group financing

The automotive supply company "H-KAT" with headquarters in Luxembourg is held by a private equity company. The principal company for Europe is located in Switzerland, with Limited Risk Distributors (LRD) as H-KAT country companies in all countries with automotive production. Their local customers are the car plants of large car manufacturers. The diesel affair caused financial difficulties for H-KAT. To secure a promised credit line of CHF 10,000,000,000, all European LRDs had to agree to genuine factoring. Your trade receivables are assigned to the Swiss principal company immediately after invoicing against compensation of 99.5% of the nominal value of the receivables. The receivables are pledged to the bank.

The default risk is demonstrably extremely low, as all customers are renowned car manufacturers. Invoices are issued by the LRDs, and the accounts receivable continue to be administered by the LRDs' accounts receivable accountants, outstanding debts are reminded and an overview of the status of the receivables is continuously prepared for the principal company.

The transfer pricing document ensures mathematically accurate determination of the spread for the factor and is based on market data such as Libor interest rates, credit ratings, etc. Finally, the document states that the resulting spread is 0.5% for the factor (principal), with the receivables still being managed by the LRDs.

In other words, the workload for the factorer remains minimal. It must primarily bear the remaining market and credit risks.

In the course of an examination, the FTA establishes that, according to the contract, this is genuine factoring and that accordingly the receipt of the payment of the claim constitutes VAT-exempted turnover. Correspondingly, the related input taxes are subject to a complete input tax adjustment. Each year, the principal collected receivables of approximately 2,000,000,000.

In spite of the documentation on the cost price, it can be shown that nothing was provided for the administration of the claims by the LRDs, and nothing was booked and compensated. It is undisputed that the claims were managed by the LRDs.

The question arises as to the third party price for the management of these claims within the meaning of Art. 24(2) MWSTG. Comparative prices are available to the FTA from professional factorers who specialise in the purchase of small loan receivables and have these receivables managed by an external specialist.

Questions

• Evaluate the application of an administrative fee for factoring with small loan receivables as a third-party comparison price.
• Which third-party comparison price and which transfer pricing methodology would you use, and what result could this lead to?

cost sharing

The insurance company VinSure Ltd. with its head office in Bermuda conducts insurance business in all major economic nations through local subsidiaries. The European business is managed by an Irish subsidiary and branches in the countries.

VinSure Group introduces a virtual Shared Centre. Each subsidiary or permanent establishment contributes to this virtual shared centre, but also receives services. The virtual shared centre has the advantage that operations can be managed 24/7 with much less effort than if full operation had to be organised in each country.

The virtual shared centre handles the following services:

• Acceptance of claims
• Customer satisfaction surveys
• Actuarial benefits, 95% of which are provided by Mumbai
• Accounting, 50% of which is done from Krakow, 30% from Manila and 20% from Buenos Aires
• Joint software development for the "e-nsurance" project, 30% of services are provided from San Francisco, 20% from Zurich and 50% from Berlin

All employees who provide the above-mentioned services book their costs on a common book. Shared centre expenses are distributed in proportion to the gross premium income generated without a premium premium supplement. The output is deducted from the proportion of expenditure to be taken over. What remains is the compensation payment.

Question

• Is it sufficient to qualify and account for the compensation payment for VAT in accordance with the transfer pricing concept? What's the argument against it?
• How would cost-sharing be organised so that VAT invoicing can be brought into line with the legal requirements?

profit split

A promising Swiss biotech company, BPh AG based in Küssnacht/SZ, would like to market its product, which has received Swissmedic and EMA approval, in Switzerland and the EU. An Amsterdam-based subsidiary, BPh NV, will be responsible for sales in the EU, while BPh AG will be responsible for R&D and IP in Switzerland. BPh AG is responsible for the management of the business and provides marketing services for sales. Conversely, BPh NV will also make its administrators available to BPh AG. The day-to-day business of BPh AG is largely conducted by BPh NV.

BPh AG provides management services of 500, administration services of 3'500 and IP rights of 4'500 to BPh NV, and administrative services of 1'500 to BPh AG.

After a long discussion between the tax consultant and the management of BPh AG, a profit split method was agreed upon. The interdependence of the tasks is considered to be very close, which is why a model that is easy to implement with a low administration depth is chosen. This should allow a fair distribution of the initial losses and future profits between the AG and the NV. Very detailed calculations with regard to the long-term value added showed that BPh AG is to receive 80% of the profit over the next five years and BPh NV 20%. In case of losses, the same key should be used. The competent authorities for the taxation of profits in both the Netherlands and Switzerland have given their written approval of this transfer pricing model, taking into account the transfer pricing documentation and the business plan (see illustration). This shows the following:

Question

• How do you assess the profit split as envisaged by the BPh Group and approved by the tax authorities of Switzerland and the Netherlands with regard to VAT?
• How is the compensation payment of CHF 6'400 from BPh NV to BPh AG to be qualified for VAT purposes?
• Obviously, both BPh AG and BPh NV receive the profit to which they are entitled in accordance with the transfer pricing guidelines. How do you assess this third price comparison based on Art. 24(2) MWSTG?

Vehicle import

PREMIO, a German car manufacturer would like to import its vehicles into Switzerland at the lowest possible cost. PREMIO Switzerland, the subsidiary, imports the vehicles.

There are three transfer pricing methods to choose from:

1. CUP method, i.e. market value at import
2. Resale minus method
3. Profit split (PREMIO 40%, PREMIO Switzerland 60%) on all main and ancillary services of the new car business including production at PREMIO and sales by PREMIO Switzerland

The vehicles are ultramodern. A large list of options is offered, especially software-based options.

Question

• With the exception of taxes on profits, for which tax is it worthwhile to carry out a detailed analysis of the value of the vehicle when it is released for free circulation in Switzerland?
• If value adjustments become necessary for this tax, how long can they be claimed?
• Which transfer pricing methodology speaks for an optimal design?