Value-added tax (VAT) is one of the most important sources of government revenue, not just in Switzerland, but in countries all over the world. Therefore, it’s important for the system to run smoothly and fairly. On 1 January 2018, the revised Value-Added Tax Act (VAT Act) and VAT ordinance entered into force in Switzerland. Moreover, Swiss voters rejected the initiative to raise VAT rates to fund the state pension scheme (AHV/AVS). There are also many new developments in the EU designed to relieve the administrative burden and counter VAT fraud. In this article, we take a brief look at the main changes.
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Director, VAT, PwC Switzerland
Under the amended VAT Act, an entity’s liability to pay VAT in Switzerland depends on its worldwide turnover. As a result, any company that generates CHF 100,000 or more in sales revenues anywhere in the world and supplies goods or services in Switzerland will from 1 January 2018 be subject to value-added tax in Switzerland, regardless of its sales in Switzerland (as opposed to the pre-2018 situation where a company is only liable for Swiss VAT if it generates sales of CHF 100,000 or more in Switzerland). There are exceptions for entities based abroad with no Swiss presence, for example if they only supply tax-exempt goods and services or make supplies where the recipient is liable for VAT by way of acquisition tax.
These changes are also relevant for Swiss companies: foreign suppliers of goods and services to Swiss recipients (for example assembly work or work on goods) must generally be registered for Swiss VAT. In such cases, Swiss businesses should check whether their suppliers really are registered to avoid corrections at a later date.
(Online) retailers will be subject to Swiss VAT from 1 January 2019 if they generate sales of at least CHF 100,000 a year with so-called low value consignments to customers in Switzerland. Low value consignments are deliveries incurring VAT of no more than CHF 5 (which means a net value of just under CHF 70 for goods subject to the standard VAT rate, or CHF 200 for goods subject to the reduced rate). Therefore, liability for Swiss VAT arises when a foreign trader takes orders that
result in a physical movement of goods across the Swiss border,
are not subject to import tax when imported into Switzerland, and
lead to total sales revenues of CHF 100,000 or more in Switzerland.
PwC offers companies that become liable for VAT in Switzerland a low-cost solution called Smart VAT, enabling them to do VAT-compliant business in this country.
Newspapers, magazines and books are subject to a reduced rate of VAT. Electronic versions of the same publications, however, used to incur VAT at the full rate. This distinction between printed and electronic matter is leading to increasing problems in practice. The disparity is also seen to put electronic media at a disadvantage.
Since 1 January 2018 newspapers, magazines and books without advertising character distributed electronically are subject to the reduced VAT rate. This is all the more remarkable given that an important difference remains: while the provision of printed matter is treated as a supply of goods from a VAT point of view, providing digital magazines is treated as a supply of services. Providers of media of this type have to make a dual distinction:
Distinguishing electronic media from other electronic services subject to the standard rate of VAT
Distinguishing media without advertising character from media with advertising character subject to the standard rate of VAT
At the end of September 2017, Swiss voters rejected a proposal to fund state pensions with an increase in VAT rates. This resulted in the following decreases in the standard and special rates:
|VAT rate||Until 31 December 2017||From 1 January 2018|
Among other things, companies have to adapt their accounting software and invoice forms, inform their staff, if necessary modify quotes and contracts, and check to see which VAT rates are applicable. What’s crucial is the moment at which the supply is made. Therefore, it might well be that the new VAT rates were already applicable in an invoice in 2017 or that invoices in 2018 for supplies made in 2017 will contain the old rates. Many companies will have issued advance invoices for supplies in 2018 in the last weeks and months of 2017. In many situations (especially if the customer is not entitled to an input tax deduction) it might now be necessary to re-issue these invoices. Please note that you can only ever deduct the tax actually invoiced as input tax.
The EU’s cross-border VAT system has a reputation for being complicated and vulnerable to fraud. It’s estimated that EU member states lose EUR 50 million as a result of VAT fraud alone every year. On 4 October 2017, the EU Commission proposed countermeasures. The core of these measures is the new notion of a Certified Taxable Person.
Certified Taxable Persons are defined by the Commission as businesses that can demonstrate compliance with certain criteria including regularly paying their tax, internal controls and solvency. On request they can be certified by their national tax authority, and as a reliable tax payer enjoy certain benefits, especially when it comes to cross-border trade. If the applicant already has Authorised Economic Operator status for customs purposes they are deemed to fulfil the Certified Taxable Person requirements.
Currently, the Commission’s proposal applies only to businesses whose economic activity is based in the EU or which have an established branch there. The same applies at present to Authorised Economic Operators. A company based in a third country such as Switzerland therefore cannot take advantage of the simplified arrangements for a Certified Taxable Person. It’s still not clear whether Swiss AEO status, which is also recognised by the EU on the basis of corresponding agreements, will be sufficient for VAT purposes in the EU.
Ultimately the EU VAT system will be based on the following cornerstones, to be introduced in 2022:
Cross-border supplies of goods from one EU member state to another will be subject to VAT at destination.
In such cross-border supplies of goods from one EU state to another, the purchaser is responsible for paying the VAT if they are a Certified Taxable Person.
In other cases, the seller is responsible for calculating and charging the VAT.
The one-stop shop is to be extended. Businesses will be able to declare and pay VAT on cross-border supplies of goods via a common portal for EU countries, as is already the case for electronic services.
The European Commission also presented a range of immediate measures. These include simplified arrangements
for call-off stock,
for the definition of the active supply in chain transactions,
for the documentary evidence required to claim an exemption for intra-Community supplies.
However, these simplified arrangements are only available to businesses registered as Certified Taxable Persons. It’s therefore questionable whether Swiss companies will also be able to benefit from the immediate measures, or whether they have to remain in the existing system with all its administrative hurdles.
Another proposal, while designed primarily to tackle fraud, also creates clarity for businesses: the VAT number recorded in the VIES (VAT Information Exchange System) database, along with a correctly drafted recapitulative statement, is to be a prerequisite for tax-free cross-border supplies.
For a business to gain Certified Taxable Person status in the EU in the future, it must avoid major or repeated violations of the tax or customs rules and committing serious criminal offences in the course of its business. It must also be able to demonstrate its solvency and a high level of control over its activities and the movement of goods.
To meet these two last criteria, a company must be on top of its VAT agenda. Many companies, including multinationals, regard VAT as a secondary function which is mostly assigned locally within their financial or tax department. However, the requirements for Certified Taxable Person status and VAT reporting mean they will have to rethink. Added to this, thanks to new possibilities in areas such as data analytics, the tax authorities are already able to gather extensive information on businesses. This way they can improve their controls and use new technologies such as blockchain to simplify administrative processes and avoid VAT fraud.
In the future, any company that operates across borders and is thus subject to complex VAT rules will have to examine VAT on a strategic level rather than viewing it in isolation. It will have to see VAT as part of an overall process rooted in the business itself, in the entire value chain, and in the business environment. A well thought-out strategy, smooth processes and state-of-the-art technologies for processing and analysing data will create cost and business advantages for companies in the medium term.