SWITZERLAND Law and Practice Contributed by: René Matteotti, Monika Bieri, Daniel Schönenberger and Manuel Ulrich, Tax Partner AG
8. Penalties and Documentation 8.1 Transfer Pricing Penalties and Defences Transfer Pricing Penalties Switzerland does not impose penalties that apply specifically in the transfer pricing context, except for violations of the CbCR requirements. As a general rule, tax adjustments to values that are determined on a discretionary basis – as is the case with transfer pricing – have no criminal consequenc - es. This principle only applies, though, to the extent that the provisions of commercial law have not been violated and the relevant transactions have been presented correctly in accordance with commercial law. However, violations of the arm’s length principle can, under certain circumstances, still be qualified as unlawful tax evasion and, in aggravated cases or tax fraud and as such be subject to penalties. This is the case if basic principles of transfer pricing have been grossly neglected and, thus, the violation of the arm’s length principle is not only recognisable by the company or the persons in charge, respectively, but downright obvious (see also 14.2 Significant Court Rulings ). In such cases, it can be assumed that the transfer prices were deliberately set in violation of the arm’s length principle. Furthermore, ignoring an ear - lier correction by the tax authorities could also give rise to a violation of the arm’s length principle that could lead to prosecution. This would be the case, for example, if the tax authority had rightly objected to an assessment in previous tax periods and the taxpayer deliberately stuck to the original estimate or approach, respectively, without disclosing it to the tax authority. In the case of tax evasion (or tax fraud), penalties may be imposed for all taxes involved. For instance, a transfer price-induced adjustment by the tax admin - istration concerning corporate income tax may trig - ger consequences regarding withholding tax or VAT. In the case of corporate income tax, the penalties are determined based on the unlawfully evaded tax amount, whereas – if the respective year has already been finally assessed – the potential penalty ranges from one third of the evaded tax to three times that amount. In general, the fine is equal to the amount of the evaded tax. Mitigating circumstances, such as full
co-operation, are taken into account when determin - ing the fine for tax evasion. If the tax has not yet been definitively assessed, there may be a case of attempted tax evasion, which reduc - es the penalty by one third. It is important to note that for the purposes of corporate income tax the fine is imposed on the company. Regarding withholding tax and VAT, however, the fine is directly imposed on the person(s) responsible for the violation. At least in these cases, the fine is not determined based on the amount of tax evaded, but according to a fixed fine range. Documentation Obligations Swiss tax laws – apart from the Federal Act on the international automatic exchange of country-by- country reports of multinational groups – do not define specific documentation requirements with respect to transfer pricing. However, taxpayers must provide all documents necessary in order to enable the tax administration to conduct a proper assessment of the taxable base. This legal obligation is based on the principle that the taxpayer and the tax adminis - tration jointly determine the relevant facts to ensure a complete and correct assessment as far as corporate income tax is concerned. In particular, taxpayers are obliged to provide the tax authorities with any informa - tion on transactions between associated companies upon request. As a consequence, despite the lack of specific documentation rules, taxpayers are strong - ly advised to have full and state-of-the-art transfer pricing documentation at hand that can, if requested by the tax administration, be disclosed. This also includes intercompany agreements with respect to the controlled transactions. Such documentation will also be helpful in the defence of potential tax evasion charges. Such documentation should also include sound and updated benchmarking studies. In addi - tion, it should be noted, that with regard to MAPs and APAs, the master and local file as well as any other relevant information for the resolution usually have to be presented by the taxpayer. If no appropriate transfer pricing documentation can be presented and the taxable base cannot therefore be properly determined, the tax administration might need to estimate the transfer prices. Even though that estimate has to be reasonable and based on experi -
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