SWITZERLAND Law and Practice Contributed by: René Matteotti, Monika Bieri, Daniel Schönenberger and Caterina Colling-Russo, Tax Partner AG
future development of the transactions that are the subject of the APA. 7.8 Retroactive Effect for APAs Basically, unilateral rulings cannot have ret - roactive effect, as ruling requests can only be accepted if they concern future affairs. However, as bilateral and multilateral APAs are based on the MAP provision of the respective tax treaty, the aforementioned restriction does not apply. Hence, APAs can, depending on the involved countries, have retroactive effect. How - ever, the retroactive reach is limited to ten years by Swiss domestic law. In practice, Switzerland seeks to limit the retroactive effect of APAs to five years. The limiting factor in practice is often the legislation in the country of the counterparty, as only certain foreign tax authorities allow a roll- back period. 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 crimi - nal consequences. 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 cor - rectly in accordance with commercial law. How - ever, violations of the arm’s length principle can, under certain circumstances, still be qualified as unlawful tax evasion (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 Signifi - cant Court Rulings ). In such cases, it can be assumed that the transfer prices were deliber - ately set in violation of the arm’s length princi - ple. Furthermore, ignoring an earlier 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 esti - mate or approach, respectively, without disclos - ing it to the tax authority. In the case of tax evasion (or tax fraud), penal - ties may be imposed for all taxes involved. For instance, a transfer price-induced adjustment by the tax administration concerning corporate income tax may trigger consequences regard - ing withholding tax or VAT. In the case of corpo - rate 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 circum - stances, such as full co-operation, are taken into account when determining the fine for tax evasion. If the tax has not yet been definitively assessed, there may be a case of attempted tax evasion, which reduces the penalty by one third. It is important to note that for the purposes of cor - porate income tax the fine is imposed on the company. Regarding withholding tax and VAT,
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