Workshop by Stefan Piller and Rita Sommariva on the occasion of the ISIS) seminar on February 05, 2025 entitled "Transfer Pricing for SMEs"
Note: This language version is an automatically generated translation. The text may therefore contain linguistic and terminological errors.
view in original language (German)AUTOMATION CH is the Swiss subsidiary of AUTOMATION NL, the headquarters of the medium-sized AUTOMATION Group, which has been active in the precision machinery sector for over 30 years.
The AUTOMATION Group’s business is highly capital-intensive, particularly at the level of its production units in Germany and India. To mitigate the Group’s liquidity risk, the Group’s management decided in 2010 to centralize the Group’s liquidity management and treasury activities at AUTOMATION NL. As a result, the finance department of AUTOMATION NL manages, among other things, the issuance of loans to the Group’s subsidiaries. With the aim of minimizing the Group’s financial exposure to external banks, the same team is also responsible for managing payment terms with customers and suppliers, as well as for managing currency risk associated with the various financial positions (the Group’s companies operate in five different currencies).
AUTOMATION CH is responsible for the distribution of AUTOMATION products in Switzerland, Germany, and Austria. In 2018, AUTOMATION CH hired a new Finance Manager who previously worked in the SME division of a Swiss bank. To ensure that intra-group financing transactions are correctly reported in the accounting systems at both the group and local levels, AUTOMATION NL asked AUTOMATION CH—specifically its Finance Manager—to support the Group’s finance department in controlling and accounting activities related to the Group’s liquidity management. Accordingly, in 2018, AUTOMATION NL and AUTOMATION CH entered into a service level agreement under which AUTOMATION CH invoices AUTOMATION NL for the services provided by its Finance Manager to the Group Finance Team (“Finance Support Services”) at cost plus a 5% markup.
In May 2023, AUTOMATION CH is requested to provide the documents listed below as part of the tax assessment for the 2022 fiscal year:
The group does not have any TP documentation. There are also no documents proving the provision of Finance Support Services. The only available document besides the general job description for the role of Finance Manager is the Service Level Agreement from 2018. Upon reviewing this document, the Managing Director of AUTOMATION CH notes that the Finance Support Services are described rather generally and, in particular, the following activities are listed among those performed by AUTOMATION CH:
Founded in 2018, LikeNew CH is a startup that buys, refurbishes, and repairs used electronic devices to sell them on the market as “refurbished” products.
LikeNew CH purchases the products from both private individuals and companies at a specific purchase price. The products are then forwarded to the subsidiary based in Slovenia (“LikeNew SI”), which carries out the necessary repairs, refurbishment, and renewal of the hardware and software components. Another subsidiary based in Austria (“LikeNew AT”) handles the administration, maintenance, and development of the online platform where the refurbished products are sold.
While preparing the budget for 2024, the new CFO (who was appointed six months earlier) notes that LikeNew SI paid more taxes in each of the fiscal years 2020, 2021, and 2022 than the other companies in the group, even though it had no revenue. And this will likely also be the case in FY 2023. He reviews the IC agreement between LikeNew CH and LikeNew SI and notes that:
The CFO is aware that LikeNew SI also retains approximately 10% of the repaired products to sell them in Eastern European markets. However, this is a secondary activity to the repair of the products. In the meantime, the founders have asked the CFO to ensure compliance with transfer pricing regulations, even though no budget has been allocated for this purpose.
CABLE CH is a Swiss-based manufacturer and distributor of electronic cables and components (switches, connectors, etc.). With approximately 20 employees, it sells its products to customers (B2B) primarily in Switzerland and in the neighboring markets of Germany and Austria.
To keep the costs of products sold in European countries competitive, CABLE CH decides to expand into Portugal: It establishes a wholly-owned subsidiary (“CABLE PT”) there and uses it as a contract manufacturer, which is compensated with a 4% markup. The production manager at CABLE CH has many years of experience in the industry and has also worked for three of the major players in the European market. In this regard, she believes that a 4% markup reflects average market practice.
The management of CABLE CH has decided to use the company’s available liquidity (which is largely generated through product sales) primarily to purchase a suitable facility in Portugal and to acquire state-of-the-art machinery in order to maintain the high quality standards of the products manufactured by CABLE PT. The management of CABLE CH expects that, after at least three years of operation, CABLE PT will reach a revenue level sufficient to cover all costs.
For the first year of CABLE PT’s operations, therefore, only the funds necessary to comply with standard regulations (payroll, financial statements, tax returns) will be available.
Questions
INNOVATIVE CH is a startup that has developed a machine learning-based solution for converting images and information captured by video cameras and sensors into room occupancy data.
Five years after its founding, INNOVATIVE CH (and its subsidiary INNOVATIVE AT) is already among the most significant IoT players in Europe and has already reached the break-even point. The co-founders and shareholders have therefore decided to expand into the neighboring markets of France and Italy within the next three years. To comply with local legal requirements regarding data collection and processing, INNOVATIVE CH established a unit in each country responsible for support services (e.g., a hotline for customers wishing to complain about data quality; assistance with troubleshooting). Each local unit charges INNOVATIVE CH a cost and profit markup.
The investors have urged the founders of INNOVATIVE CH to ensure that transfer prices are adhered to across the entire group to prevent the results achieved so far from being undermined by tax challenges. However, this should not come at the expense of the resources needed to develop the new version of the solution, whose launch is also planned for the next two years.
Question
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1 Portuguese transfer pricing regulations currently do not require local companies to prepare specific transfer pricing documentation, although they expect intra-group transactions to be conducted on arm’s length terms.
2 INNOVATIVE CH is aware of the “penalty protection regime” in force in Italy but is not yet prepared to invest in the preparation of a Local File and a Master File in accordance with Italian TP regulations.
