Swiss Principal Companies (February 2014)
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Swiss Principal Companies (February 2014)

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Need for action due to recent clarification of practice and requirements by the Federal Tax administration

Need for action due to recent clarification of practice and requirements by the Federal Tax administration

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    Swiss Principal Companies (February 2014) Swiss Principal Companies (February 2014) Presentation Transcript

    • Swiss Principal Companies: Need for action due to recent clarification of practice and requirements by the Federal Tax administration February 2014 International Corporate Tax
    • 1 © 2014 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Key: Sales Flow of goods Flow of money Swiss principal company selling products via Limited Risk Distributors Parent Co Swiss Principal Co Raw materials Customer Manufacturer Distributor Limited Risk Sales Arrangement Manufacturing Agreement
    • 2 © 2014 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Conditions for taxation as a Principal Company for Direct Federal Tax purposes General conditions According to Circular No. 8 of the Swiss Federal Tax Authorities of 18 December, 2001 (“Circ. No. 8/2001”), a principal company is defined as a business model used by international companies to streamline their regional structures and centralise functions, responsibilities, and risks within the group. The controlling company of such a business model is defined as the principal company. Depending on the specific requirements, this company can undertake, in particular, purchasing, production planning and management, stock management and logistics planning, development of marketing strategy, the sales planning and management, treasury and finance, as well as administrative activities, for its globalised markets. Manufacturing is partly carried out on behalf and for the account of the principal company by group companies, or by third parties (“contract or toll manufacturing”). The remuneration for these companies will be determined based on the manufacturing costs and a percentage profit margin. Finished goods may also be purchased from third parties or other group companies. The goods are to be sold by group companies (distribution companies). Sales are to be transacted exclusively on behalf of the Group companies through the LRDs. Basically, the distribution companies carry out the function of transaction-authorised agents for the principal company within the meaning of Circ. No. 8/2001. International tax allocation The core factor of the taxation of principal companies is the international profit allocation between the Swiss principal company and the foreign distribution companies. Only that part of net profit related to distribution activities falls under the international tax allocation. Where finished goods sold to third parties are manufactured by group companies or by third parties on behalf or for the account of the principal company (“contract or toll manufacturing”), 70% of the profit, with the exception of financial and other income, qualify as profit from distribution activities. The remaining 30% of the profit represents profits from the manufacturing activities of the principal company. If the finished goods sold are purchased from third parties, with the exception of financial and other income, these profits qualify exclusively as profits from distribution activities. According to Circ. No. 8/2001, the portion to be allocated as not taxable in Switzerland is determined at Swiss federal level on a lump-sum basis. Accordingly, the profit from distribution activities amounts to 50%. Thereby, the principal company‟s assumption of all risks is taken into particular account. Should the sale of the goods take place exclusively in the context of contract and/or toll manufacturing, 35% (50% of 70%) of the profit, with the exception of financial and other income, will be allocated outside Switzerland. The remaining 65% will be subject to taxation in Switzerland through the Swiss principal.
    • 3 © 2014 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Need for action due to recent clarification of practice and requirements by the Federal Tax administration I Concept and requirements Over the last years, the practice of the Swiss tax authorities with respect to principal companies has evolved constantly. However, most developments remained unpublished. In order to satisfy the need for a harmonized practice and understandable requirements, the Swiss federal tax administration has now „inofficially‟ published guidelines which clarify the practice and requirements applicable to principal company. The guidelines apply with immediate effect to old, pending and new tax ruling requests filed with the Swiss tax authorities. In short, the new guidelines include the following requirements:  According to the distribution model applied, the distributors need to be exclusive and economically speaking dependent on the Swiss principal. As such, the sales entities should be organised as commissionaires or stripped buy-sell distributors. According to the new guidelines, a distributor is exclusive and dependent provided at least 90% of its profits relates to the Swiss principal business  The distributors‟ level of compensation is under increased scrutiny and a new safe harbor rule was introduced by the FTA. Indeed, the distributors’ gross margin (i.e. revenue./.costs of goods) may not exceed either 3% of its revenue or its higher OPEX. Should the compensation exceed these thresholds, an adjustment of the principal benefit is needed  Key functions and risks of the trading business have to be allocated to the Swiss company. In the event certain key functions are outsourced, the principal company benefits may be reduced  Swiss Principal companies may negotiate an APA or MAP with other countries (e.g. distribution network) and still benefit from the Principal taxation scheme. In addition the following requirements (which are however in place until many years) have to be met:  The company has to employ a sufficient number of personnel, including the key decision makers of its business  The contractual arrangements have to comply with the business model in practice Next slides demonstrate a control calculation scheme requested by the federal tax authorities to check whether you fulfill max. distribution margin limitation of the LRDs. Although the Swiss tax authorities have stated that the above mentioned practice and requirements may be adapted in future based on experience made, there is a clear need for action in relation to existing principal rulings. Therefore, in anticipation to such discussions, the following aspect of principal structures should be analyzed in detail:  Review of activities performed by the distributors and determination whether any issue arises with respect to the requirement of exclusivity  Review of the gross margin at the level of the distributors and preparation of supporting documentation  Review and identification of key functions and roles which may be outsourced (are outsourced)
    • 4 © 2014 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Need for action due to recent clarification of practice and requirements by the Federal Tax administration II  According to the recent verbal information from the federal tax authorities of January 2014, it is envisaged that the federal tax authorities inform all cantons of the new practice regarding Swiss principal structures by February 2014.  The cantons will receive clear instructions on approaching all principal companies in their jurisdiction and discuss with them the implementation of the new practice. The federal tax authorities have stated that principal companies that already exist will have to fulfill the new requirements in 2015/2016 at the latest in order to continue to be eligible for the principal company taxation scheme.  Based on this new information, we anticipate that, in the event of non-compliance with the new regulations, no adjustments to the taxation for fiscal years which have not yet been finally assessed or a denial of the principal company taxation scheme will need to be expected. However, we nevertheless recommend analyzing your principal setup already at this stage in order to prepare possible setup changes to meet the new requirements in 2015/2016.  For pending and new tax ruling requests, the new guidelines apply with immediate effect and no adaptation period until 2015/2016 is granted as is the case for existing principal structures.
    • 5 © 2014 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Calculation examples based recent clarification of practice and requirements by the Federal Tax administration I (Trade) Calculation example based on effective gross margin of LRD of 14.5% Calculation example regarding international tax allocation according to KS8/2001 (based on fictional figures) Pincipal with no production New practice: Old practice: Total net profit of the principal according to income statement 350 350 ./. Net income from financial investments -50 -50 ./. Net income from other activities (except production and trading) -30 -30 = Profit from production and trade 270 270 ./. Profit from direct sales, domestic sales, sales over independent sales companies -10 -10 = Profit from production and trade over depedent foreign sales companies (100%) 260 260 ./. Profit from production (0%) [fully taxable in Switzerland] 0 0 Profit from trade (70%) = profit from sales over dependent sales companies 260 260 + Effective gross margin (difference between revenue and cost of goods) 500 0 ./. Allowed gross margin authorised by FTA of 3% of revenues or higher OPEX (incl. interests and taxes) -360 0 + Surcharge on functions transferred to foreign subsidiaries (Outsourcing) 0 0 = Adjusted profit from trade of principal company before profit allocation 400 260 ./. Foreign profit allocation (50%) -200 -130 Ajusted profit from trade of principal company after profit allocation 200 130 = Taxable net profit Switzerland ; max. = profit according to income statement; min. = Taxable net profit Switzerland according to Old practice 290 220 Calculation of correction Total revenues LRDs: 3,450 Total cost of goods: 2,950 Effective gross margin (difference between revenue and cost of goods): 500 Gross margin: 14.49% Operational costs LRDs -350 Total EBIT LRDs: 150 Operating margin: 4.35% ./. Interests and taxes -10 Profit of LRDs 140 3% of revenues 104
    • 6 © 2014 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Calculation examples based recent clarification of practice and requirements by the Federal Tax administration II (Trade) Calculation example based on effective gross margin of LRD of 2% Calculation example regarding international tax allocation according to KS8/2001 (based on fictional figures) Pincipal with no production New practice: Old practice: Total net profit of the principal according to income statement 350 350 ./. Net income from financial investments -50 -50 ./. Net income from other activities (except production and trading) -30 -30 = Profit from production and trade 270 270 ./. Profit from direct sales, domestic sales, sales over independent sales companies -10 -10 = Profit from production and trade over depedent foreign sales companies (100%) 260 260 ./. Profit from production (0%) [fully taxable in Switzerland] 0 0 Profit from trade (70%) = profit from sales over dependent sales companies 260 260 + Effective gross margin (difference between revenue and cost of goods) 70 0 ./. Allowed gross margin authorised by FTA of 3% of revenues or higher OPEX (incl. interests and taxes) -104 0 + Surcharge on functions transferred to foreign subsidiaries (Outsourcing) 0 0 = Adjusted profit from trade of principal company before profit allocation 227 260 ./. Foreign profit allocation (50%) -113 -130 Ajusted profit from trade of principal company after profit allocation 113 130 = Taxable net profit Switzerland ; max. = profit according to income statement; min. = Taxable net profit Switzerland according to Old practice 220 220 Calculation of correction Total revenues LRDs: 3,450 Total cost of goods: 3,380 Effective gross margin (difference between revenue and cost of goods): 70 Gross margin: 2.03% Operational costs LRDs -50 Total EBIT LRDs: 20 Operating margin: 0.58% ./. Interests and taxes -10 Profit of LRDs 10 3% of revenues 104
    • 7 © 2014 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Calculation examples based recent clarification of practice and requirements by the Federal Tax administration III (Trade + Production) Calculation example based on effective gross margin of LRD of 14.5% Calculation example regarding international tax allocation according to KS8/2001 (based on fictional figures) New practice: Old practice: Total net profit of the principal according to income statement 350 350 ./. Net income from financial investments -50 -50 ./. Net income from other activities (except production and trading) -30 -30 = Profit from production and trade 270 270 ./. Profit from direct sales, domestic sales, sales over independent sales companies -10 -10 = Profit from production and trade over depedent foreign sales companies (100%) 260 260 ./. Profit from production (30%) [fully taxable in Switzerland] -78 -78 Profit from trade (70%) = profit from sales over dependent sales companies 182 182 + Effective gross margin (difference between revenue and cost of goods) 500 0 ./. Allowed gross margin authorised by FTA of 3% of revenues or higher OPEX (incl. interests and taxes) -360 0 + Surcharge on functions transferred to foreign subsidiaries (Outsourcing) 0 0 = Adjusted profit from trade of principal company before profit allocation 322 182 ./. Foreign profit allocation (50%) -161 -91 Ajusted profit from trade of principal company after profit allocation 161 91 = Taxable net profit Switzerland ; max. = profit according to income statement; min. = Taxable net profit Switzerland according to Old practice 329 259 Calculation of correction Total revenues LRDs: 3,450 Total cost of goods: 2,950 Effective gross margin (difference between revenue and cost of goods): 500 Gross margin: 14.49% Operational costs LRDs -350 Total EBIT LRDs: 150 Operating margin: 4.35% ./. Interests and taxes -10 Profit of LRDs 140 3% of revenues 104
    • 8 © 2014 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Calculation examples based recent clarification of practice and requirements by the Federal Tax administration IV (Trade + Production) Calculation example based on effective gross margin of LRD of 2% Calculation example regarding international tax allocation according to KS8/2001 (based on fictional figures) New practice: Old practice: Total net profit of the principal according to income statement 350 350 ./. Net income from financial investments -50 -50 ./. Net income from other activities (except production and trading) -30 -30 = Profit from production and trade 270 270 ./. Profit from direct sales, domestic sales, sales over independent sales companies -10 -10 = Profit from production and trade over depedent foreign sales companies (100%) 260 260 ./. Profit from production (30%) [fully taxable in Switzerland] -78 -78 Profit from trade (70%) = profit from sales over dependent sales companies 182 182 + Effective gross margin (difference between revenue and cost of goods) 70 0 ./. Allowed gross margin authorised by FTA of 3% of revenues or higher OPEX (incl. interests and taxes) -104 0 + Surcharge on functions transferred to foreign subsidiaries (Outsourcing) 0 0 = Adjusted profit from trade of principal company before profit allocation 149 182 ./. Foreign profit allocation (50%) -74 -91 Ajusted profit from trade of principal company after profit allocation 74 91 = Taxable net profit Switzerland ; max. = profit according to income statement; min. = Taxable net profit Switzerland according to Old practice 259 259 Calculation of correction Total revenues LRDs: 3,450 Total cost of goods: 3,380 Effective gross margin (difference between revenue and cost of goods): 70 Gross margin: 2.03% Operational costs LRDs -50 Total EBIT LRDs: 20 Operating margin: 0.58% ./. Interests and taxes -10 Profit of LRDs 10 3% of revenues 104
    • 9 © 2014 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Contacts Reiner Denner Partner T: +41 58 249 42 40 M: +41 79 239 82 62 E: rdenner@kpmg.com Markus Wyss Partner T: +41 58 249 41 29 M: +41 79 708 30 26 E: mwyss@kpmg.com Roberta Venturi Lechartier Senior Manager T: +41 58 249 52 98 M: +41 79 345 50 21 E: rventuri@kpmg.com