International Tax Planning and Transfer Pricing Planning: Switzerland from a US perspective

• Author: Professor Dr. Rainer Zielke
• Profession: Professor in business economics at Østfold University College, Halden, Norway
• Updated at: April 2017

Contenido 1 Abstract tax planning 2 Abstract transfer pricing planning 2.1 Introduction 2.2 The low tax country Switzerland in the OECD context 2.3 Transfer pricing rules of Switzerland 2.3.1 Country-per-Country (CbC) reporting 2.3.2 Laws and rules 2.3.3 Arm's length principle 2.3.4 Transfer pricing methods 2.3.5 Definition of related companies 2.3.6 Reporting requirements 2.3.7 Documentation requirements 2.3.8 Cost sharing 2.3.9 Business restructuring 2.3.10 Dispute resolution 2.4 Calculation of the case studies in international tax planning between Switzerland and the USA 2.4.1 Design of the tables 2.4.2 The treaty Switzerland-USA in brief 2.4.3 BEPS Project progress 2.4.4 Switzerland in brief 2.4.5 The USA in brief 2.4.6 Design of case studies 2.4.7 Case study 1: Dividends from Switzerland to the US 2.4.8 Case study 2: Interests from Switzerland to the US 2.4.9 Case study 3: Royalties from Switzerland to the US 2.4.10 Case study 4: Management and technical service fees from Switzerland to the US 2.4.11 Case study 5: Capital gains with Switzerland as asset country to the US as seller country 2.4.12 Case study 6: Dividends from the US to Switzerland 2.4.13 Case study 7: Interests from the US to Switzerland 2.4.14 Case study 8: Royalties from the US to Switzerland 2.4.15 Case study 9: Management and technical service fees from the US to Switzerland 2.4.16 Case study 10: Capital gains with the US as asset country and Switzerland as seller country 2.5 Concluding remarks 3 Notes

Abstract tax planning

According to the International Monetary Fund, Switzerland confirms in 2016 with a gross domestic product (GDP) of US$ 662,483 million the eight-highest GDP of Europe. In Switzerland the federal corporate income tax is levied at flat rate of 8.50% (effective rate of 7.83% if the deductibility of the tax due is taken into consideration). No other federal income taxes are imposed. In addition each canton levies an income tax, Cantonal and municipal taxes account for a significant part of the total tax burden in Switzerland. In this survey, the combined corporate income tax rate of the canton of Zug is used, resulting to a tax rate of 14.80%. Thus, Switzerland is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries – such as Switzerland - by means of tax planning measures. Switzerland has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, in Switzerland economic growth is rising but will remain moderate as the global outlook remains subdued. The labor market has been resilient, and the recent modest unemployment increase should be reversed by 2018. Interest rates are projected to remain low, helping to revive domestic demand. Deflation is ending as the currency has stabilized. The huge current account surplus will persist. Monetary policy settings are appropriate, but risks from a long period of negative policy rates are rising. Although less buoyant than earlier, the housing market merits continued vigilance. This chapter provides a survey on the actual tax law frame conditions in Switzerland and practical support in international tax planning and transfer pricing planning between Switzerland and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Switzerland applies the arm’s length principle and the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale price method, the cost plus method, and the transactional net margin method. In general, there is no hierarchy between the methods. Companies are related if a commercial or personal relationship exists between the companies. In general, companies are regarded as related if one company holds 50% or more of the voting capital of the other company. However, even when shareholding is less than 50%, companies can be regarded as related if one company has a significant influence over the other company. The Swiss tax authority normally follows the definition of "associated enterprises" as defined by OECD. There are no reporting, but documentation requirements. Cost sharing is allowed and business restructuring possible according to OECD standards. There is no interaction between customs valuation and transfer pricing, as retroactive transfer pricing adjustments do not affect the customs valuation. The tax authority may adjust the taxable income if transactions have been made not in accordance to the arm's length principle. The limitation on transfer pricing adjustments by tax authorities is ten years from the end of the tax year. Advance pricing agreements are available.

Introduction

International tax planning and transfer pricing planning between Switzerland as stable, prosperous and high-tech economy and enjoying great wealth, being ranked as the wealthiest country in the world per capita in multiple rankings, and and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2016 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, ^[1] Switzerland confirms in 2016 with a gross domestic product (GDP) of US$ 662,483 million the eight-highest GDP of Europe. In Switzerland the federal corporate income tax is levied at flat rate of 8.50% (effective rate of 7.83% if the deductibility of the tax due is taken into consideration). No other federal income taxes are imposed. In addition each canton levies an income tax, Cantonal and municipal taxes account for a significant part of the total tax burden in Switzerland. In this survey, the combined corporate income tax rate of the canton of Zug is used, resulting to a tax rate of 14.80%. Thus, Switzerland is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries – such as Switzerland - by means of tax planning measures. Switzerland has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, ^[2] in Switzerland economic growth is rising but will remain moderate as the global outlook remains subdued. The labor market has been resilient, and the recent modest unemployment increase should be reversed by 2018. Interest rates are projected to remain low, helping to revive domestic demand. Deflation is ending as the currency has stabilized. The huge current account surplus will persist. Monetary policy settings are appropriate, but risks from a long period of negative policy rates are rising. Although less buoyant than earlier, the housing market merits continued vigilance. Uncertainties remain regarding the implementation of the immigration quota decided in the 2014 referendum, even though some progress is being made. The ongoing reforms to corporate taxes are welcome. The fiscal position remains solid with the surplus expected to be maintained. The solid fiscal balance and the low government debt give significant room to boost high-quality spending, notably on public investment, which has been modest in recent years. Government bonds yields are negative up to 10-year maturities. Interest payments have been halved since 2005 to 0.6% of GDP. Projects that would raise productivity and green the economy should be prioritized. Expanding provisions for early childhood education and care would help ensure that growth is more inclusive.

According to Orbitax, ^[3] (Daily Tax News Digest of 1 December 2016),

the Swiss Federal Council has announced its adoption of the Ordinance on International Automatic Exchange of Information in Tax Matters (AEOI) ^[4] and the revised Tax Administrative Assistance Ordinance^[5], which provides for spontaneous exchange of information. The AEOI ordinance contains the Federal Council's implementing provisions for the Federal Act on the International Automatic Exchange of Information in Tax Matters (AEOI Act), which provides for the exchange of financial account information under the OECD Common Reporting Standard (CRS). The ordinance will enter into force on 1 January 2017, with the first exchanges to take place in 2018.

The revised Tax Administrative Assistance Ordinance defines the framework and the procedures required for the spontaneous exchange of information including those that apply for the exchange of information on advance tax rulings. The revised ordinance will enter into force on 1 January 2017, with the first spontaneous exchanges of information taking place from 1 January 2018.

According to Orbitax, ^[6] (Daily Tax News Digest of 7 October 2016) Switzerland's Federal Supreme Court has held that a Swiss bank is prohibited from sharing with the U.S. the names of financial advisers who aided U.S. residents in setting up undisclosed Swiss bank accounts. In the decision released on October 5, the court explained that the U.S. lacks an adequate level of data protection within the meaning of the Swiss Data Protection Act. The decision concerned an unnamed Ticino-based bank that planned to provide information to the IRS and the U.S. Department of Justice (DOJ) under the terms of the DOJ's Swiss Bank program. The bank intended to provide the DOJ with the names of two Swiss lawyers who were the authorized representatives for the bank accounts of U.S. beneficial owners. In addition, the bank planned to reveal the name of a law firm that worked with U.S. clients. The court acknowledged that providing the names of so-called facilitators to the U.S. may still be justified provided the failure to do so would intensify the legal dispute with the U.S. and harm Switzerland's reputation as a financial center. In this case, however, it was not shown that...