General information on transfer pricing
Questions and answers on transfer pricing
The arm's length principle is used to calculate transfer prices for tax purposes between enterprises belonging to the same group. According to this principle, transactions of all kinds between these enterprises must be conducted on the same terms as would be agreed upon between unaffiliated third parties in the open market and under comparable circumstances.
The Swiss legislator has not enacted any specific legislation on transfer pricing. However, the arm's length principle is applied on the basis of various provisions in tax legislation.
The arm's length principle is detailed in the OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Transfer Pricing Guidelines). Although their content is not binding, the Swiss tax authorities and courts refer to the Guidelines, and use them as a source for interpreting the arm's length principle.
The OECD Transfer Pricing Guidelines are not binding under Swiss legislation. They are, however, a tool for interpreting the arm's length principle enshrined in Article 9 of the OECD Model Tax Convention on Income and on Capital. The Swiss tax authorities and courts therefore frequently refer to the OECD Transfer Pricing Guidelines and apply them as a source of interpretation of the arm's length principle, in the context of the application of DTAs and Swiss domestic law. In its circular No. 4 of 19 March 2004 (Circular 4/04) on the taxation of service companies, the FTA pointed out that its Director at the time had already informed the cantonal tax administrations, in a letter of 4 March 1997, that they should take into account the OECD Transfer Pricing Guidelines.
The OECD Transfer Pricing Guidelines have been revised and supplemented several times since they were first published. In taxation proceedings, the FTA refers to the version of the OECD Guidelines that was published at the time the tax liability under review arose. This practice is in line with the case law of the Swiss Federal Supreme Court on the application of the OECD Transfer Pricing Guidelines.