Swiss Court Grants Belgian Request for TP Information
In a decision of 31 May 2022, but published on 7 July, the Swiss Federal Court (Bundesgericht), the highest court in Switzerland, confirmed that the Swiss tax administration must comply with a request for information from another tax administration. However, it states that the other tax administration must demonstrate that it needs the information for a transfer pricing examination and that it is not part of a fishing expedition (2C_455/2021)
The Belgian tax administration was auditing the accounts of three Belgian companies and found commissions for centralised purchasing paid to a Swiss procurement center under the cost-plus method. To check the validity of the commissions paid to the Swiss corporation, the Belgian tax authorities had asked the Swiss tax authorities for the annual invoices submitted by the Swiss corporation to the Belgian entities, as well as the corporation’s tax returns.
The Swiss administration had granted the information document request (IDR), and the corporation filed a motion to suppress it with the Bundesverwaltungsgericht, but this court rejected the request on 7 May 2022 (A-5034/2020).
The plaintiffs, the three Belgian companies and the Swiss corporation claimed that the undesverwaltungsgericht did not show what the Swiss tax assessments were intended to prove and that the IDR would violate the principle of subsidiarity. They argued that the Belgian tax authority did not exercise its domestic investigative powers and request the Swiss tax returns from the Belgian company. The plaintiffs also argued that the requesting authority could check the transfer prices without the requested annual invoices.
The Court disagreed and said that article 5, paragraph 1 of the automatic information exchange agreement between the Swiss Federation and the EU requires the exchange of "foreseeably relevant" information “in so far as the taxation under such domestic laws is not contrary to an applicable double taxation agreement between Switzerland and the Member State concerned.”
According to the established case law of the Court, the requirement of "foreseeable relevance" must ensure that information is exchanged as comprehensively as possible. However, the contracting states are not permitted to request information at random or request information that is unlikely to shed light on the tax affairs of a specific taxable person. More pointedly, the lower court had said that a fishing expedition to gather information that is probably not relevant is not permitted.
The country that receives a request for information must only check the plausibility of the request of the other country’s administration. And contrary to what the plaintiffs asserted, the Bundesverwaltungsgericht did not have to examine what the tax assessments were intended to prove or what conclusions about the internal transfer pricing strategy could be drawn from those assessments.
The Bundesgericht explained that in transfer pricing cases, the decisive factors for assessing the requirement of foreseeable relevance of an international IDR are simply that the facts presented in the request for administrative assistance and the information requested are connected, and there is a reasonable possibility that the information requested will prove to be relevant.
The transfer prices are reflected in the accounting profit of the Swiss corporation, which is also the basis of the income to be declared in the tax return of the Swiss corporation. Within the group the Swiss corporation is responsible for centralized purchasing and charges the Belgian group companies a commission as compensation for the services provided. These transfer prices are included in taxable income via the accounting profit. The Court concluded that the Swiss tax returns contain information relating to transfer pricing.
The alleged violation of the principle of subsidiarity in connection with tax assessments also falls short, according to the Court. According to article 26 of the Vienna Convention on the Law of Treaties, it is assumed that a country bound by an international treaty acts in good faith.
Since the Belgian tax administration sent an email to the Swiss tax authority confirming that it had used all its means to receive the requested information, Switzerland must trust the information provided by the requesting country. The Bundesgericht found that this assumption of good faith can only be overturned on the basis of concrete, proven evidence, which the plaintiffs did not present.