Transfer Pricing Documentation in Switzerland: A Key Consideration for SMEs

AGN EMEA Tax Committee News

Introduction

Transfer pricing is a crucial issue – not only for multinational enterprises – but also for small and medium-sized enterprises (SMEs) operating in Switzerland. The tax authorities have increasingly focused on transfer pricing compliance to prevent base erosion and profit shifting (BEPS). In response, Swiss tax authorities have aligned their practices with the OECD Guidelines, adding certain Swiss-specific nuances that SMEs must understand when preparing transfer pricing documentation.

Transfer Pricing Regulations in Switzerland

Switzerland does not have standalone transfer pricing legislation but observes to OECD Transfer Pricing Guidelines. The Swiss Federal Tax Administration (SFTA) incorporates the arm’s length principle into Swiss laws, requiring that related-party transactions be priced as if they were conducted between independent parties. This principle applies to cross-border transactions and any violations could result in significant tax adjustments, penalties, and interest charges.

Documentation Requirements for SMEs

While Switzerland does not mandate local transfer pricing documentation, SMEs are required to follow the guidelines under OECD BEPS Action 13, particularly the three-tier documentation approach:

1. Master File: Offers a high-level overview of the multinational group’s global operations, focusing on the business and transfer pricing policies.
   
2. Local File: Contains detailed financial and transactional information of the Swiss entity, including specifics on intercompany transactions.
   
3. Country-by-Country Report (CbCR): Large multinational groups with consolidated revenue exceeding CHF 900 million are required to submit Country-by-Country Reporting (CbCR) as part of Swiss compliance. This report provides aggregated data on the global allocation of income, taxes paid, and certain indicators of economic activity among different tax jurisdictions. It also contains a list of all the entities in the MNE group and their activities, offering tax authorities insights into the MNE’s global profit distribution and tax bases.

Although not obligatory for smaller companies, SMEs must maintain adequate documentation to demonstrate compliance in case of audits or disputes.

Recent Developments in Swiss Transfer Pricing Guidance

Earlier in 2024, the SFTA, in collaboration with the Swiss Tax Conference (SSK), published the first comprehensive transfer pricing guidance. The full document of 23 January 2024 is available here in English and here (download in German). This publication provides detailed instructions on how to apply the arm’s length principle, the meaning of the comparability analysis, and the list of the preferred transfer pricing methodologies.

• Key Elements of the Guidance: 
  • Comparability Analysis: Swiss taxpayers are now required to apply the OECD’s nine-step process for comparability to ensure that transactions align with market conditions.
    
  • Transfer Pricing Methods: The publication reinforces the use of both traditional methods (e.g., Comparable Uncontrolled Price, Resale Price, and Cost Plus) and profit-based methods (e.g., Transactional Net Margin Method).
    
  • Intra-Group Services: A simplified approach allows a fixed 5% mark-up for low-value and routine activity performed intra-group services, without the need for a detailed benchmarking study.
  • Financial Transactions: New rules require either the use of SFTA-provided safe harbour interest rates or, alternatively, robust external benchmarking for intercompany loans and guarantees.

This updated guidance is essential for SMEs in ensuring that their intercompany transactions meet Swiss and international standards. Swiss taxpayers are encouraged to engage in advance pricing agreements (APAs) with tax authorities to secure pre-approval of transfer pricing policies.

Challenges for SMEs

SMEs in Switzerland face specific challenges related to transfer pricing compliance:

• Resource Constraints: SMEs often lack internal resources or expertise in managing complex transfer pricing analyses and documentation.
  
• Compliance Costs: The costs associated with preparing detailed transfer pricing documentation may be burdensome for SMEs, particularly compared to larger multinationals.
  
• Lack of Awareness: Many SMEs might be unaware of their transfer pricing obligations, especially when they perceive their intercompany transactions as minor or straightforward.

Penalties for Non-Compliance

Non-compliance with the arm’s length principle may lead to significant tax adjustments, higher liabilities, and interest charges. The SFTA’s updated guidance emphasizes the importance of providing adequate documentation to support the arm’s length nature of related-party transactions, even though there is no specific legal mandate for SMEs to maintain a master or local file.

Recommendations

Compliance with transfer pricing regulations is increasingly relevant for SMEs in Switzerland, not just for multinational corporations. Swiss SMEs must ensure that their transactions align with both domestic and international standards to avoid penalties. Maintaining thorough documentation can provide essential defence in the event of audits or disputes with tax authorities.

Brought to you by the AGN EMEA Tax Committee

If you have any questions in relation to this article, please get in touch with Rocco.

Rocco Arcidiacono
Partner & Swiss certified tax expert, TEP
Fiduciaria Mega SA

Email: rocco.arcidiacono@fiduciariamega.ch