• Gerhard Foth, Partner |

In the recent past, tax audits conducted by authorities in Switzerland have become more common. As such, Switzerland is becoming "more normal" like other countries. For Swiss groups however, this raises the question how to prepare for such tax audits. 

Recent developments

With both the Federal Tax Administration and also various cantonal tax authorities having increased their focus on transfer pricing topics in the past, one could argue that Switzerland is merely catching up with other countries. For Swiss companies, this development is still new. As such, it is important to get familiar with recent experiences from such tax audits and evaluate how to best prepare.

General observation

The recent experience in Switzerland resembles very much the experience that has been made in other countries many years ago: extensive information is being requested, and discussions are not always up to the highest technical standards. At the moment, both tax authorities and taxpayers are gaining experience with such tax audits in Switzerland. It is now important for taxpayers to be properly prepared and not take Swiss tax audits too light-heartedly.

Lesson 1: Processes around tax audits

Especially companies belonging to a group headquartered outside of Switzerland should have clarity as to who is responsible for what when it comes to a Swiss tax audit. Who should be talking to the tax authorities? Who has the authority to decide which information is handed over? Who has decision power when it comes to a negotiation of the tax audit result? 

In many groups, these questions are tackled on an ad-hoc basis – however, during a tax audit, time is often tight, and engaging in discussions about such processes when the tax authorities are already in the meeting room distracts from other important matters.

Lesson 2: Operational transfer pricing

While it may have been sufficient in the past to show that your overall TP system was ok, tax authorities have shown their ambition to also look behind the scenes and understand (and also audit) in more detail how the transfer pricing system is operated. How exactly have TP adjustments for limited risk distributors or contract manufacturers been calculated? How has a profit split booking been derived? How was the cost basis for a service charge determined? You need to be able to show to the tax authorities a transparent documentation of these calculations that can also be traced back to numbers that can be found in the accounting system. Simply providing messy excel files to the authorities is not sufficient and may actually be counter-productive.

Lesson 3: Transfer pricing documentation

In the past, Multinational Enterprises (“MNE’s”) have typically excluded Switzerland from the preparation of TP documentation, given that tax authorities were more lenient on this point. Now the clear expectation of tax authorities is that contemporaneous documentation in accordance with the OECD standard is provided at the beginning of a tax audit. Such documentation is also regularly required as part of the standard information request when a tax audit is initiated. As such, having proper local documentation also for the Swiss entity has become more important in the recent past. Regarding the design and form of the documentation (and this links into Lesson 4 below), while in the past, tax authorities have often been flooded with large volumes of  documents, it is nowadays important to keep it short and precise rather than extremely extensive, to give tax authorities a good overview on the value chain and business model.

Lesson 4: Proper introduction for the tax authorities

Transfer pricing documentation and other documents requested by the tax authorities may be extensive. At times, it may be not so easy for outsiders to properly evaluate what is important and what is less important. As such, providing the tax authorities at the outset of a tax audit with an introduction to the company, the business model, transfer pricing system and available documents is certainly helpful to enable the tax authorities to focus their attention to relevant matters.

Lesson 5: Service transactions

Experience has shown that tax authorities like to dig deep into service transactions – nature of the services, cost base, profit mark-ups, reconciling calculations to account entries, etc. This should be considered when choosing where to invest time in the tax audit preparation.

Conclusion

None of the lessons learned is in any way or form surprising or specific to Switzerland. However, it is a new development for Swiss companies to be subject to tax audits where transfer pricing is challenged in many cases. So a change in how tax audits in Switzerland are approached is required. The above mentioned lessons learned from the recent past may serve as a guide on what should be considered in tax audit preparation.

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