Switzerland vs “A Pharma Distributor SA”, December 2024, Administrative Court, Case No A 2023 1

Posted on | By Courts of Switzerland
Category: Benchmark, Range and Median, Comparability Analysis, Limited Risk Distributor, Losses | Tag: , , , , , , , ,
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“A Pharma Distributor SA” (A SA), is a Swiss pharmaceutical company that had been acquired by a Canadian group and subsequently turned into a limited risk distributor. Following the restructuring A. SA had reported a negative operating margin of -21.8% for 2018 to achieve an overall average operating margin of 1.2% over a three-year period (2016-2018).

The tax authorities adjusted the 2018 operating margin to 1.1%, which resulted in additional taxable profit of CHF 8,922,473.

A. SA appealed, arguing that its three-year average operating margin of 1.2% should be recognized instead of an annual assessment.

Judgment

The Administrative Court dismissed the appeal and upheld the tax authority’s adjustment.

The court examined whether A. SA’s reported losses for 2018 were justified under Swiss tax law. The company argued that OECD Transfer Pricing Guidelines permit the use of multi-year data to determine appropriate margins and that adjustments could be necessary due to delayed pricing changes in international markets. However, the court upheld the tax authorities’ position, emphasizing that Swiss tax law follows the principle of periodicity, requiring profit assessments on an annual basis. The court found no legal basis for retrospectively smoothing margins over multiple years to artificially align with an arm’s length range.

Additionally, the court determined that A. SA had not provided sufficient evidence to justify its substantial losses in 2018. It ruled that the company’s intra-group transactions, including inflated purchase prices and transfer pricing adjustments, lacked economic substance and likely constituted a hidden profit distribution.

 

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Related Guidelines

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Supplemental Guidance

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