The revised Swiss VAT law (Federal VAT Act, MWSTG/LTVA) has been in force since January 1 2010. In the meantime the Swiss Federal Tax Administration (FTA) has also published numerous brochures, providing detailed information on how it interprets the law on key VAT issues such as tax liability, taxable supplies, input tax and settlement, and on the most important industry sectors.
Even so, in some cases it has taken the administration almost two years to commit itself to its new practice and in certain areas, such as the financial and aviation sectors, it still has not decided on definitive interpretations of the law.
Despite this, the 2010 VAT legislation has significantly reduced the formal requirements, which is also reflected in the scale of corrections required after FTA audits. The trend in case law is also positive, at least at Federal Administrative Court level, with substantially more proceedings decided in favour of the taxable person. Unfortunately, however, the federal court still doesn't always uphold the view of the lower courts.
The peculiarities of the Swiss VAT Act
The Swiss VAT Act is consistent with the EU's directive on VAT in terms of the fundamental rules. Even so, there are still significant differences. The notion of supply of goods, for example, goes a lot further in Switzerland than in the EU. Supply of a good on which work has been performed is deemed to be a supply of goods even if the good is not altered by the work. Making a good available for use or exploitation (rental or lease agreements) is also deemed to be a supply of goods and not a service. As for the place of supply, Switzerland does not make any distinction between B2B (business-to-business) and B2C (business-to-consumer). As a basic catch-all rule, the place of supply is determined to be the place at which the recipient of the service has its place of business, unless the law specifies another solution, which is, for example, the case for all supplies related to land.
There are also certain differences when it comes to VAT liability. Basically, anyone carrying on a business is liable to pay VAT, but they are exempt if they do not generate more than Sfr100,000 turnover from taxable supplies. This threshold is much higher in Switzerland than in the EU.
There is another difference regarding places of business. While the EU treats permanent establishments (PEs) and the head office as a single entity, Switzerland views PEs in cross-border structures as taxable persons independent of headquarters. Depending on the set-up, this can lead to double taxation or double non-taxation.
The positive aspects of the Swiss VAT Act
The Swiss VAT Act has a whole range of positive aspects that are still little known abroad.
- Tax liability arises at the beginning of the business activity, so a business can register before the revenues start to flow in and thus already enjoy full recovery of input VAT. In contrast with the EU, pure holding companies can also register for VAT. Acquiring, holding and selling shares qualify as a business activity, and the input VAT can be recovered for entities of this sort in Switzerland.
- For most VAT-exempt activities without credit of input VAT, the option of choosing taxation is also available. This is especially advantageous in cases where the contracting party is also VAT-registered and can recover this additionally invoiced VAT. It is possible to make flexible use of this optional taxation. Taxpayers can opt for taxation separately for each contractual relationship and the pre-approval of the FTA is not required. Generally it is possible to use the option simply by stating the tax on issued invoices. However, the option of choosing taxation is not possible for finance and insurance transactions or for properties used exclusively for private purposes.
- If the option to tax is available for a VAT-exempt supply without an input tax credit performed for a customer established in Switzerland, the input VAT is also deductible when the supply is provided to a customer established outside Switzerland.
- Compared to the situation in the EU and numerous other countries, Switzerland is also a paradise in terms of administrative requirements. There are only a few formal requirements, and this significantly limits the risk for businesses. For example, an input tax deduction only requires proof that the input tax has been paid. The result of this reduction in formal requirements is that the corrections required after FTA audits are on average only around one-third of what they were 10 years ago.
- Not only this, but the FTA is also more customer-friendly in its dealings with taxpayers. For example, taxable persons can ask for a ruling and receive legally binding information from the FTA. It is also possible to agree on pragmatic solutions with the administration.
- The comparatively low rates of VAT in Switzerland should also not be forgotten. The standard rate is 8%, and there is also a special rate of 3.8% and a reduced rate of 2.5%.
Because Switzerland has not introduced the special Tour Operator Margin Scheme (TOMS), where VAT is hidden in the margin, meaning it is non-recoverable by the recipient, there are a number of reasons why Switzerland is also an ideal place for tour operators:
- No Swiss VAT is charged for supplies of goods and services purchased by Swiss tour operators and supplied by them in their own name to their customers which are used and enjoyed outside Switzerland. Such supplies would be hotel accommodation, travel arrangements, restaurant services, various events and other typical tourist services. VAT is also not due for the tour operator's margin related to these supplies. This applies to supplies to all customers, regardless of whether they are private individuals or taxable persons.
- As Swiss tour operators are able to deduct VAT charged to them by their Swiss suppliers (for example, hotel fees and transport arrangements), no hidden VAT is accumulated, which further reduces the costs for travel operators and their customers. In theory, since they are acquiring services for their taxable supplies, Swiss tourist organisers should be able to reclaim VAT charged to them in various EU and other countries as well, as long as this is permitted by the local VAT rules of the respective country.
- In addition, on occasions when VAT has to be charged by a Swiss tour operator, customers of the operator registered for VAT purposes in Switzerland or many foreign countries can in principle deduct or reclaim VAT charged to them for supplies purchased for business purposes. This decreases the cost of business travel, training, seminars, conferences and other business-related activities.
- Finally, Switzerland also offers an interesting option related to supplies of all services that are subject to the general rule. As the general rule is that the place of supply of services is where the recipient is established (regardless of whether the recipient is a taxable person or not), for the majority of services (including consulting, finders', membership and data processing fees) this will result in Swiss VAT not being charged to a customer established or living outside Switzerland, even if this customer is a private individual. This further reduces the cost of other services (which are in principle not subject to TOMS in the EU) offered by companies established in Switzerland to private individuals outside Switzerland.
Under the terms of article 72 of the Federal VAT Act, because quarterly VAT returns are provisional in nature the annual correction of errors is of key importance. The taxable person has until the end of August of the following year to reconcile their return on the basis of figures from their accounts. If they find errors, they must report them to the FTA using the prescribed form. This is also the deadline for notifying the FTA of any instances where the taxable person's handling of their VAT diverges from the administration's practice. If in the course of an audit the FTA finds that the taxable person has failed to apply properly clear legal provisions, ordinances of the authorities or published practice rules and does not inform the FTA in advance, article 96 of the VAT Act lays down a fine of up to Sfr200,000 ($212,000) for tax evasion.
The FTA has only recently published details of its practice regarding the differentiation between tax-exempt transfer of real estate and taxable supplies and the tax liability of charitable organisations. The FTA is expected to publish guidance on its practice related to services rendered to (foreign) collective investment vehicles shortly. At the beginning of the year the Swiss Federal Council also passed a dispatch on a further revision of the VAT Act.
Practice regarding differentiation when it comes to taxable supplies of goods and tax-exempt sales of real estate has already been amended three times over the last two years. Since the publication of the March 2013 notes, the deciding factor for differentiation will be whether the contract to buy the real estate was signed before or after the commencement of construction work. This means that from a VAT point of view, sellers of buildings that have not yet started construction have to pay particular attention to the point at which they sign the contract to sell the real estate. If the contract is signed before construction commences, the FTA assumes that the purchase price (excluding the value of the land) is subject to VAT. If the contract is signed after building commences, the transaction is deemed to be a sale of real estate that is not subject to VAT. Companies can choose whether they want to apply the old practice (which is based on the buyer's requests for changes and down payments) for the period from January 1 2010 to June 30 2013, or whether they want to start working on the basis of the date the contract was signed from January 1 2010 already. From July 1 only the new practice will be valid. This choice is an opportunity to take a critical look at the past and correct the previous return if necessary.
Charities face VAT impact
It was only at the end of 2012 that the FTA published more detailed notes on tax liability with regard to the definition of entrepreneurial activities, an issue of particular importance for charitable organisations. If a particular area of a (charitable) organisation receives payment for an activity, or only on a clearly subordinate basis, this area is not deemed to be engaging in entrepreneurial activity. FTA practice states that this is the case if revenues from products and services are unlikely to cover more than 25% of expenditure for an activity in the long term. If the FTA concludes on the basis of its criteria that the activity is not geared to the long-term generation of revenues, this area is exempted from tax liability; by the same token, however, it will be ineligible for an input tax deduction. The challenge for (charitable) organisations now is to find out whether the new practice is applicable to them, and what measures they will have to take for past and future periods.
Bad news for collective investment schemes
The revised Collective Investment Schemes Act (CISA) will presumably take effect in the first quarter of 2013. It also contains a revised article pertaining to VAT, the effects of which are only gradually being recognised. They could lead to a further weakening of the Swiss financial centre. Initial statements from the FTA have given rise to concern that something is about to change in terms of foreign collective investment schemes. In future it is to be expected that, from a VAT point of view, the distribution of domestic and foreign collective investment schemes within Switzerland will be treated equally.
Under existing law, the management services rendered for foreign collective investment schemes are not addressed by CISA, which makes them ineligible for VAT exemption. These services fundamentally qualify as taxable but, based on the place-of-receipt principle, can be invoiced with 0% VAT and are eligible for input tax deduction.
Now asset managers of foreign collective investment schemes will also be compulsorily subject to CISA, and will therefore require a licence from FINMA (Swiss Financial Market Supervisory Authority) to conduct their business. The FTA is using the broader scope of applicability of CISA as an opportunity to also include management services rendered to foreign collective schemes in the tax exemption. As a result, asset managers will lose the right to deduct input tax on these services, which of course will lead to higher costs. The bottom line: Switzerland loses another locational advantage.
Until now, any comments on the effects CISA will have on VAT have remained largely (or perhaps conveniently) unspoken. But if one goal of the revision – the preservation of the Swiss financial industry's competitiveness – is to be achieved, then conducive tax conditions should be part and parcel of the deal. A tax exemption for the management of foreign collective investment schemes would be a clear step backwards. Those affected still have the opportunity to exert an influence on future practice. Drafts of the FTA's new practice should become available in the first quarter of 2013.
In its dispatch on VAT reform published at the beginning of 2013, the Swiss Federal Council proposes two variants of a two-rate VAT model. Under the minimal variant, the reduced VAT rate would only apply to food and to services provided in the restaurant and hotel sectors. Under the maximum variant, things such as newspapers, books, drugs, radio and TV licence fees, which are already subject to a lower rate would retain their privileged status, which would now also be extended to the hotel and restaurant industry. To ensure that these changes do not result in a reduction in tax revenues, the reduced rate under the minimal variant would have to be increased from 2.5% to 2.8%. Under the maximum variant the reduced rate would be raised to 3.8%.
In addition to the question of VAT rates, the reform deals with other matters such as simplifying tax liability for the public sector, tax relief for cooperation between public bodies and reintroducing the taxation of margins on art objects.
However, even if the two-rate model makes it through the political obstacles and a referendum, it will not enter into force until 2016 at the earliest.
Niklaus Honauer has been a tax and legal consultant for nearly 30 years and since 1990 with PwC. He consults for both multinational and mid-sized companies on all kind of indirect tax questions. He is one of the leading indirect tax consultants in Switzerland and well known by the industry and the tax administration. With his position as member of the indirect tax leading board in Europe he has a direct link to all PwC ITX partners all over the world.
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