We are delighted to feature an interview with Stephen Alleway who is the Transfer Pricing Partner at Questro International, a specialist TP Consultancy and Director at Otico Software, engaged in developing time-saving tax software. Stephen is a frequent contributor to publications on transfer pricing and speaks widely on the subject in Switzerland and at international conferences, webinars, and other events. He is listed in various advisor guides as a leading European TP specialist (e.g. expertguides.com, and is active on Linkedin, TaxLinked, and OffTax, where you can find links to his recent articles and speaking engagements. Otico has recently produced BEPS related software called TP Controller to assist in the production of CBCR, Masterfile and Country Files, and enable better controlling of global TP data and analytics.
Stephen's contact details are set out at the end of this interview.
What practical impact is BEPS currently having on the day to day approach taken by tax authorities in Switzerland?
From a day-to-day perspective, I would say the impact has not yet been fully felt. Certainly the Swiss tax authorities are more cautious in respect of agreeing to favourable tax rulings that may end up in competent authority dispute and are by “default” asking for comprehensive supporting TP reports prepared by an external advisor. BEPS developments are followed closely here and OECD guidance applied in practice in Switzerland. We have seen some tentative use of the update to Chapter VI (Intangibles) to attack offshore IP structures, but not widespread. There have also been some comments in respect of the potentially lower threshold to create a PE, but again at a very early stage. From my perspective, it is important to remember that Switzerland has been a net beneficiary over the last 10-20 years of the types of structures that BEPS was set up to challenge. In this regard, they probably have more to lose than gain by a very robust implementation of the new guidance.
The bigger impact from BEPS in Switzerland is in respect of the willingness of MNCs to relocate key functions of their business to Switzerland (diminished, although this may also be because of the very high Swiss Franc), and the massive domestic tax changes in Switzerland, which are a direct result of the OECD’s pressure and BEPS.
It is important to note that Switzerland is currently undertaking the most comprehensive corporate tax reform in a generation (Corporate Tax Reform III) that will result in the phasing out of many special tax privileges (i.e. holding, mixed company, domiciliary company regimes as well as the principal company regime and finance branch regime). Whilst final details have not been agreed, this will likely take effect from 2019 and result in a significantly lower general level of corporate tax, without the special incentives of the past.
How do you see this approach changing as BEPS develops and tax authorities in Switzerland continue to respond to it?
We will likely see Switzerland competing strongly on its overall tax rates with other European countries, whilst accepting the tax base in Switzerland is only defendable if companies maintain “real substance” locally. In this respect, Switzerland will need to be more robust in challenging incorrect TP arrangements itself when they are to Switzerland’s disadvantage (i.e. off-shore IP structures). It will also be interesting to see if the Cantonal Tax Authorities start to use the BEPS deliverables in inter-cantonal tax disputes (which are now a lively source of domestic disputes).
In your experience, what types of intercompany charges are most problematic in Switzerland?
Traditionally, I would say royalty charges (especially if the IP is owned off-shore) and finance flows, but intra-group cost allocations have also drawn the attention of authorities locally. A few years ago, there was a big focus on Banks and Asset Managers who lent funds or entered into agreements to manage funds offshore and the Swiss tax authorities always argued for a profit split approach irrespective of the benchmarking and facts. However, the local environment from a TP risk perspective has been fairly benign historically and most of my work has been outbound on the “foreign end” of the transaction.
What are the most common mistakes, which large corporates make in dealing with tax authorities in Switzerland in relation to intangibles?
Assuming that Switzerland doesn’t have transfer pricing regulations, putting IP offshore with no substance, and assuming there is no real penalty in Switzerland for incorrect TP arrangements. It is important to note that for Swiss WHT purposes, transfer pricing adjustments can be considered as deemed profit/dividend distributions, subject to 35% Swiss withholding tax. This is grossed-up to 54% if the Swiss withholding tax charge itself is not borne by the beneficiary (accepting the tax might be partially credited or refunded based on a potential double tax treaty between Switzerland and the corresponding foreign tax jurisdiction). This is a real risk for certain offshore structures.
From a practical perspective, how important are intercompany agreements for MNE’s when responding to transfer pricing challenges in Switzerland relating to intangibles?
I would say very important since it can provide key lines of argumentation at the point of challenge. Without any agreement you lose much valuable ground and the importance of clear agreements increases in a post BEPS world. That said, the agreement will only help you if it is broadly in line with the substance of the underlying arrangements (i.e. “substance over form”).
How likely are tax authorities in Switzerland to require copies of intercompany agreements to be provided when reviewing an MNE’s transfer pricing?
In my experience they are almost always requested. Naturally, if you don’t have an intercompany agreement other documents can perhaps be tendered to show the “intent of the parties”, but this always puts the client on the back foot in discussions.
APAs and lower level rulings - how significant are these in Switzerland?
Unilateral rulings are very common in Switzerland, but for the reasons mentioned above, I would see the Swiss tax authorities being more cautious in issuing any related to TP. Also, if CIT Reform III is implemented, there will be a large reduction in the volume of rulings anyway, which were historically often targeted towards seeking a special tax status/privilege.
APAs will likely grow in importance, although Switzerland is reasonably active for a small country in concluding APAs already.
Do you see this changing as a result of BEPS?
The real impact of BEPS locally is the challenge it presents Switzerland, Luxembourg, and other traditional “tax planning jurisdictions” that will need to quickly adapt from “poacher” to a “game-keeper” role in the International Tax Community. Whilst the most abusive tax structures have been long dead in Switzerland, the country has benefitted disproportionally from a lot of “tax planning” that the likes of the US, UK, Germany, France, and others would very much like to challenge. Many see BEPS as giving them the tools to mount such challenges. In this respect, I’m often reminded of the American bank robber, Willie Sutton, who was asked by a journalist why he robbed banks and responded “Because that’s where the money is”. Unfortunately, Switzerland is where “Money” is (i.e. significant taxable profits are booked here).
Intellectual property rights and related royalty charges are a key feature of the global operations of many MNEs. How do you see BEPS changing the approach taken by MNEs in relation to the management of intellectual property rights?
We are already seeing a number of clients exit their Offshore IP structures and bringing the IP back to Switzerland or other European countries. I think this trend will continue. In the long term IP ownership and core R&D activities will need to be in the same jurisdiction and the idea that simple payment of R&D costs establishes valuable IP ownership rights will be difficult to defend.
In what ways will BEPS affect the level of compliance resource which MNEs will need to invest in managing transfer pricing issues?
The impact is and will be very significant, but we don’t believe it can be managed by simply adding headcount. Tax departments need to accept that they have been over-reliant on manual or semi-manual processes for too long. The days of doing tax consolidations in excel, tracking Uncertain Tax Positions (UTPs) in excel, and storing TP documents in nested folders on a company intranet or poorly structured share drive are hopefully coming to an end. We will see an IT revolution in tax over the next 5-10 years and on the TP side, the opportunities for efficiencies are huge. Whilst everyone talks about IT, few are able to implement real time saving solutions. Anyone who is as old as me will remember the Victor Kiam Remington TV ads from the 80s, and to paraphrase him “I like TP Software so much I bought the company” (well founded one at least, see www.otico-software.com).
How would you change / improve the OECD’s approach in relation to BEPS?
I think the OECD deserves much credit for the work it has done. Obviously the guidance is written from a “Principles Perspective” rather than a “Rules Perspective” and this will always leave a very fertile ground for dispute and challenge. Personally I would have probably guided for the CBCR submission to be mandatory at a local level with the local entity tax return and I don’t fully see the benefit of a very complicated process to effectively get to the same result in the end, i.e. pushing out automatically via the Multilateral Instrument or upon request (i.e. demand based) via exchange of information provisions for those countries that don’t sign up to the Multilateral Instrument.
Contact details for Stephen Alleway
Forchstrasse 84, 8008 Zurich, Switzerland
+41 78 744 42 45 (Questro)
+31 20 205 10 47 (Otico)
+41 43 508 39 16 (mobile)
Get practical advice & insights on the Legal Implementation of Transfer Pricing for Multinational Groups