Update

Getting all the dimensions of VAT right


From documentation and audits by the Federal Tax Administration (FTA) to the appeals procedure, it pays to think ahead and get all three phases of the value-added tax (VAT) process right. Here you’ll find why this is important, and how to go about it.

Niklaus Honauer

Niklaus Honauer

Partner, Tax and Legal Services

Saphira Borer

Saphira Borer

Manager, Tax and Legal Services

VAT is based on a self-assessment system, with every organisation responsible for filing its own declaration. Whether or not it has done so correctly will emerge, at the very latest, when the FTA conducts a VAT audit. So the first dimension in successfully handling VAT is accurate documentation. Master the second dimension by preparing properly for a VAT audit, and you’ll avoid surprises. And if you don’t agree with the findings of the audit, you can take remedial action in the third dimension, the appeals procedure.

Dimension 1: documenting VAT processes

It’s up to the taxable person to document VAT processes, but often a lack of time, awareness or resources means that errors creep in. Errors and shortcomings can remain hidden for years and only emerge when the FTA conducts a VAT audit. This can result in substantial additional charges. For this reason it makes sense to draw up a VAT handbook describing and documenting VAT processes – if necessary with the help of an expert.

When documenting VAT processes, the taxable person should keep the following special cases in mind:

  • Is there evidence to prove the tax-exempt status of exports with export documents?
  • Are supplies correctly assessed as VAT-exempt without credit?
  • Can you prove that input tax has been paid?
  • Is an input tax correction plausible on the basis of supplies exempt from the tax without credit?
  • Are supplies to employees declared correctly (for example company vehicles)?
  • Has the FTA issued instructions in previous audits, and are these instructions being followed?
  • Are VAT processes reviewed on a regular basis and brought into line with the latest legislation and FTA practice?

If an organisation has particularly complex flows of goods and services and transactions, or if FTA practice is not clear, the organisation should have the legal situation clarified with a ruling. This gives maximum legal certainty, and means the organisation can fall back on the FTA’s definitive ruling if there are questions later on. Let’s look at an example: following discussions on the method of input tax correction a company was able to present a nine-year-old ruling to the FTA and convince the administration that the method it was using was correct. But this doesn’t always work; if the legal basis or the circumstances have changed, the ruling might no longer be binding. For this reason rulings should be regularly reviewed and updated.

Dimension 2: preparing for a VAT audit

Every year the FTA conducts around 9,000 VAT audits. According to a recent study, three out of four audited entities report their VAT incorrectly. For this reason VAT audits often result in an additional tax charge. In most cases the announcement of a VAT audit unleashes a flurry of hectic activity. It doesn’t have to be this way. You can prepare properly by addressing the audit actively and preparing your VAT documentation wisely.

You should work on the basis of the turnover and input tax reconciliation as defined in Art. 128 of the VAT Ordinance (MWSTV). If you don’t have a reconciliation, you might not have much time before the audit starts. A taxable entity that does a reconciliation every year can concentrate on reviewing special cases.

If documentation is missing or no plausible explanations of the practice applied can be produced, the VAT auditor can make corrections or a fair assessment of the tax claim. Experience has shown that it is often difficult to make the FTA change its stance. When it comes to the audit itself, the following considerations are crucial:

  • Is it possible to access your accounting systems directly, and can access be restricted (for example to prevent access to personnel data)?
  • Does the FTA auditor have a contact on site to whom they can address their concerns?
  • Are external experts available in the event that there are differences of opinion?
  • Have kick-off and debriefing meetings been organised?

VAT Litigation Team

The Litigation Team is there to help in legal and administrative proceedings. We draft objections and appeals, analyse the application of the current VAT law and court rulings, and review precedents and their implications for organisations.

Preparing thoroughly for a VAT audit pays off. Whatever happens, the entity should carefully check the assessment notice issued by the FTA following the audit, which will contain any corrections. It may have to explain the divergent item to the FTA in writing and submit additional documentation.

Dimension 3: appeal proceedings

If an assessment notice has been issued and the FTA cannot be convinced after further discussions, there is still the option of an appeal. The procedure consists of three stages: from filing a written objection with the FTA, followed by filing an appeal with the Federal Administrative Court, all the way up to the Federal Supreme Court.

A successful appeal requires an experienced tax lawyer; with a combination of in-depth knowledge of VAT and experience in legal proceedings, appeal proceedings do have a fair chance of success. Figure 1 shows that in the last five years, 278 VAT appeals have been rejected by Federal Administrative Court, and 108 have been approved. In other words, around one third of appeals are successful.

Figure 1: Outcomes of VAT proceedings before the Federal Administrative Court

Source: Federal Administrative Court * incl. partially approved
* incl. partially approved

On the basis of published judgements, the success rate before the Federal Supreme Court is around 25%.

Figure 2: Outcomes of VAT proceedings before the Federal Administrative Court

Source: Pricewaterhouse Coopers AG * incl. partially approved
* incl. partially approved

But the figures also show that many cases are sent back to the FTA for additional clarification of the facts, or end in not being considered because of a failure to meet certain procedural requirements. The reason for that may lie in a lack of knowledge of procedural law, for example a failure to meet deadlines or make applications correctly. This is especially unpleasant for an entity if the appeal is not heard by the Federal Administrative Court or Supreme Count despite having good chances of success.

Let’s examine an example of a positive ruling by the Federal Administrative Court that clearly demonstrates that litigation can make sense, even in cases where the chances of success seem limited. In the case at hand it was a question of whether an invoice without a VAT number qualified for an input tax deduction under the old VAT law (valid until the end of 2009). Since the supplier had become insolvent, the VAT was never paid to the FTA, resulting in a loss of tax. A key consideration for the court was that the formal error in the invoice was not directly causal in terms of the loss of tax. In addition to a refund of the rejected input tax deduction, the court awarded interest of more than CHF 130,000 and costs.

We’re at your service!

Niklaus Honauer

Niklaus Honauer

Partner, Tax and Legal Services

+41 58 792 59 42

Saphira Borer

Saphira Borer

Manager, Tax and Legal Services

+41 58 792 55 53

Summary

Given that VAT is based on self-assessment, it’s especially vulnerable to system error. This makes it all the more important for the taxable person to review its processes on an ongoing basis, adapt their documentation accordingly and check their filing at least once a year. If it comes to an FTA audit, it pays to act cautiously before, during and after the audit.