Switzerland: Considerations for transfer pricing year-end adjustments

As the year-end approaches, companies may already be thinking about issues related to financial year closing. Year-end adjustments are one of the typically recurring transfer pricing issues.

Companies will want to determine that actual financial results match what is defined in transfer pricing policies and intercompany agreements. As such, it can be a broad and convenient device—but with some negative side-effects.

Year-end adjustments are simple to execute and are a very popular instrument used by many Swiss and international headquarter companies. While its use is convenient, there are certain challenges to year-end adjustments:

Year-end adjustments for the benefit of the receiving company—e.g., a Swiss headquarter company making a true-up payment to a foreign limited risk distributor (LRD) to achieve its target margin—may not be challenged from the foreign tax authorities, they could still be challenged from a Swiss tax perspective. This may be the situation when a loss position of a LRD is not caused by transfer prices but rather local mismanagement. Companies therefore need to carefully review the extent to which year-end adjustments are made and not use this instrument carelessly. In any case, appropriate documentation of any year-end adjustment would be beneficial.

Year-end adjustments to the detriment of a foreign company—e.g., a LRD making a payment to its Swiss headquarter company to bring its profitability down to a certain benchmarking range—are often heavily scrutinized by local tax authorities. Tax authorities may challenge if such payments reflect third-party behavior even though the result of such year-end adjustments might be in line with third-party results. It may be prudent to avoid these types of year-end adjustments. If such a year-end adjustment is executed, companies need to consider whether intercompany agreements allow for such true-down payments and document the specific case accordingly. 

While there can be challenges from tax authorities, year-end adjustments often trigger a need to correct customs declarations which can be a burdensome and time consuming process as year-end adjustments may have to be allocated to single transactions. 

In order to prevent challenges from tax and customs authorities, it may be appropriate to avoid or minimize year-end adjustments. The basis for this is a clear process that helps to monitor actual transfer pricing results and allows companies to implement prospective transfer pricing adjustments rather than make year-end adjustments. While analytics tool can help to better monitor transfer prices on an ongoing basis and take appropriate actions throughout the year, the most important action is to investigate the reasons for deviations from transfer pricing policies and the need for year-end adjustments.

There can be various reasons why companies cannot avoid year-end adjustments. Typical reasons might be data limitations or lack of resources and responsibilities. However, many challenges can be addressed and solved in a step-by-step approach for continuous and incremental improvements. Therefore, companies can start by analyzing the reason why they must make adjustments at the year-end.

Read a November 2021 report prepared by the KPMG member firm in Switzerland