Switzerland vs “Trust Administrator A. SA”, September 2019, Federal Supreme Court, Case No 2C_343/2019

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A Swiss company provided administration and other services to trusts. According to the company a related party in the Seychelles handled the daily business and received remuneration in accordance with an intra-group service agreement.

Due to the service fees paid the Swiss company reported losses. Following an audit the tax administration issued an assessment where the fees paid to the related company in the Seychelles had been determined using the cost plus (5%) method.

Judgement of the Supreme Court
The court dismissed the appeal of A. SA and upheld the assessment of the tax authorities. The Court confirmed that the Seychelles company only performed routine functions without assumption of any significant risk. The cost plus 5% remuneration was therefore confirmed.

4.6. According to the OECD Committee on Fiscal Affairs, by referring to the conditions that would prevail between independent enterprises for comparable transactions (i.e. for “comparable open market transactions”) in making the profit adjustment, the arm’s length principle takes the approach of treating the members of a multinational group as separate entities. In doing so, the focus is on the nature of the transactions between the members of the multinational group and whether the terms and conditions of those controlled transactions differ from those that would be obtained for comparable transactions in the open market. This analysis is referred to as “comparability analysis” (OECD Guidelines 2010, § 1.6).

The OECD Committee on Fiscal Affairs clarifies that the application of the arm’s length principle is generally based on a comparison of the terms of a transaction between associated enterprises and those of a transaction between independent enterprises. For such a comparison to be meaningful, the economic characteristics of the situations considered must be sufficiently comparable (OECD Guidelines 2010, § 1.33). Five characteristics or “comparability factors” may be important in assessing comparability: the characteristics of the goods or services transferred, the functions performed by the parties (taking into account the assets deployed and the risks assumed), the contractual terms, the economic circumstances of the parties, and the industrial and business strategies pursued by the parties (OECD Guidelines 2010, § 1.36). In the context of a benchmarking exercise, the examination of these five factors is inherently twofold, as it involves analysing the factors that affect the taxpayer’s controlled transactions and those that affect comparable transactions in the open market (OECD Guidelines 2010, § 1.38).

In the absence of comparable transactions, the arm’s length price is determined by other methods, such as the cost plus method. This method consists in particular in determining the costs incurred by the company providing the service, to which an appropriate margin is added so as to obtain an appropriate profit taking into account the functions performed and the market conditions (judgment 2C_11/2018 of 10 December 2018, para. 7.4).

The appellant does not dispute that, with the exception of the 2011 business year, which showed an accounting profit of CHF 155,319, it made losses during the years 2008 to 2012 and declared zero taxable profits, taking into account the losses carried forward, for all tax periods. It also did not dispute that the customers had no contact with the subsidiary, which had only one customer, the parent company, that the parent company bore all the marketing and canvassing costs, as well as the entire salary of the director, that the contracts were concluded solely between the parent company and the customer, that the people working for the subsidiary were less qualified than those working for the parent company, that the staff of the subsidiary performed purely executory tasks ordered by the parent company, and finally that the risks with regard to the customer were borne by the parent company. The asymmetry between the appellant’s successive losses and the totality of its tasks and expenses, while the subsidiary provided only low-value-added services, was a sufficient indication that the price of the services provided by the subsidiary was disproportionate (see OECD Principles 2010, § 1.70). In these circumstances, the previous court could rightly consider that the burden of proof was reversed and that it was up to the appellant to show that the cost of the services in question was commercially justified. The claim that the rules on the allocation of the burden of proof had been violated was rejected.

6.2. The appellant complains in vain that the previous instance confirmed the application of the cost-plus method instead of the comparable market transaction method. It fails to see that the latter method, as explained above (see recital 4.6), requires a twofold examination, since it involves analysing the five comparability factors, including the functions performed by the parties (taking into account the assets used and the risks assumed), which have an impact both on the taxpayer’s controlled transactions and on comparable transactions on the open market.

In the present case, the previous instance rightly found that the respondent authority had analysed the relationship between the appellant and the subsidiary, the content of the service contract of 6 February 2009, the functions performed by the appellant, in particular marketing and prospecting, and the allocation of commercial risks, whereas the appellant, wrongly arguing that the comparability analysis had been wrongly defined, in particular with regard to the company’s cost structure (see The appellant, wrongly arguing that the comparability analysis was incorrectly defined, in particular with regard to the company’s cost structure (cf. appeal memorandum, p. 5), confined itself to providing extracts from pages found on the internet setting out the prices charged by its competitors. However, it appears, as the previous court rightly held, that these documents do not make it possible to ascertain that the transactions in question are indeed free market transactions comparable to those carried out between the appellant and its subsidiary as described by the respondent authority. The appellant, who bears the burden of proof (see recital 6.1 above), has therefore failed to demonstrate that the prices charged by its subsidiary were commercially justified, having regard to comparable transactions on the free market. It follows that the previous court did not violate Art. 58 para. 1 let. b LIFD by confirming the respondent’s choice of the cost-plus method, which is, moreover, recommended by the 2010 OECD Guidelines for intra-group services (§ 7.31). The appellant did not criticise the finding by the previous court that the unusual nature of the services in question was recognisable by its administrator, nor the amount of the services taken back. The appeal is dismissed.

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Swi Decision 2C_343-2019