Determination of the hypothetical arm's length price for partner companies

Facts

Parties and facts:

• The Kraftwerke A. AG (taxpayer) is a mixed-economy company that produces electricity and sells it to its shareholders (partners).
• The tax authority of the canton of Graubünden (assessment authority) assessed the taxpayer for the tax periods 2009 to 2011 and imposed discretionary surcharges.
• The taxpayer filed appeals, which were partially upheld, and lodged complaints with the administrative court and the Federal Supreme Court.

Main issue:

• The determination of the hypothetical arm's length price and the question of whether there is a hidden profit distribution.
• The method for calculating the cost base and the cost surcharge.

Relevant facts:

• The taxpayer has share capital of CHF 50,000,000 and commercial law equity of CHF 59,890,000 (2009), CHF 59,400,000 (2010) and CHF 59,535,000 (2011).
• The annual costs charged to the partners amounted to CHF 32,309,000 (2009), CHF 22,052,000 (2010) and CHF 25,013,000 (2011).
• The assessment authority and the administrative court disputed the method for calculating the hypothetical arm's length price, in particular the inclusion of the equity capital interest and the amount of the cost surcharge.

Considerations

The Federal Supreme Court examines the interpretation and application of Art. 58 para. 3 DFTA and Art. 24 para. 5 DTHA, which regulate the determination of the hypothetical arm's length price for partner companies.

First, it is established that the cost markup method is the appropriate method for determining the hypothetical arm's length price. The cost base should include full costs, including the booked taxes and the notional interest on equity. The lower court and the assessment authority…