The Swiss Value-Added Tax
Transcription
The Swiss Value-Added Tax
The Swiss Value-Added Tax John F. Due* PRÉCIS Le 1er janvier 1995 la Suisse introduisit une taxe sur la valeur ajoutée dont le taux de base était de 6,5 pour cent; pour les produits alimentaires et certains produits de première nécessité, le taux était de 2 pour cent. Comme de coutume en Suisse, la taxe fut instaurée par décret, et non par une loi en bonne et due forme votée par le parlement. Malgré tous les soins apportés à formuler la nouvelle taxe, son introduction suscita très rapidement de nombreuses plaintes dans le monde des affaires, ce qui amena le Conseil national (chambre basse du parlement) à nommer une commission chargée de réexaminer la taxe et d’élaborer un projet de loi pour remplacer le décret en vigueur. La commission reçut de nombreux mémoires. En août 1996 elle présenta son rapport et un projet de loi. Le vote au parlement aura probablement lieu en 1997. Les problèmes qui ont entraîné la création de la commission n’étaient pas les seuls à régler. Le nombre d’entreprises demandant à se faire enregistrer se révéla de loin supérieur au nombre qui avait été estimé en tenant compte des chiffres de l’ancienne taxe de vente. Les contrevenants également étaient beaucoup plus nombreux que ce que l’on avait anticipé. Enfin, l’industrie hôtelière protesta avec force contre le taux de base de 6,5 pour cent qui lui avait été imposé. Ces difficultés ont amené le gouvernement à introduire certains changements dans la structure et l’administration de la TVA avant que la nouvelle législation recommandée par la commission n’entre en vigueur. Les effectifs du personnel administratif furent augmentés afin d’accommoder le nombre plus grand que prévu d’entreprises enregistrées. Le taux applicable aux hôtels et aux autres lieux d’hébergement à court terme fut réduit à 3 pour cent. Un autre changement important concerne les services internationaux. L’imposition de ces services sera modifée de façon considérable. Essentiellement, la responsabilité de payer la taxe dépendra, selon le genre de service, ou bien de l’endroit où le service est rendu, ou bien de l’endroit où l’usager du service fait affaires. Un crédit intégral de taxe sur intrants a été autorisé pour les dépenses d’entreprises sujettes à certaines limites auparavant, à l’exception des frais de représentation et des dépenses * The author is greatly indebted to Dr. Heinz Keller and Mr. Karl Egger of Hauptabteilung Mehrwertsteuer, Eidgenossische Steurverwaltung, Switzerland, for their assistance. 260 (1997), Vol. 45, No. 2 / no 2 THE SWISS VALUE-ADDED TAX 261 pour nourriture et boissons. Enfin, le gouvernement allégea sensiblement les conditions reliées à l’enregistrement facultatif et pour le recours à une forme simplifiée de calcul. Ces changements ont eu comme résultat apparent le net recul du pourcentage des contrevenants. Dans l’ensemble, la taxe est maintenant appliquée d’une manière satisfaisante, et la loi proposée n’apportera pas de changements significatifs dans sa structure globale. ABSTRACT On January 1, 1995, Switzerland introduced a value-added tax at a basic rate of 6.5 percent and a rate on food and some other basic necessities of 2 percent. As is common in Switzerland, the tax was established by ordinance, not as a formal act of parliament. Despite the substantial care that went into the framing of the tax, its introduction quickly provoked substantial complaints by the business community. These complaints led the National Council (the lower house of parliament) to appoint a commission to review the tax and develop a law to replace the existing ordinance. The commission received numerous submissions, and in August of 1996 it issued its report and a draft of the proposed law. Parliament will probably vote on the legislation in 1997. The problems that led to the appointment of the commission were not the only concerns. The number of firms that applied for registration turned out to be much larger than the number expected on the basis of the old sales tax. Delinquency was much higher than anticipated. Finally, the hotel industry complained strongly about the application to it of the basic 6.5 percent rate. These complaints have led the government to make some changes in the structure and the administration of the VAT in advance of the new legislation recommended by the commission. The administrative staff has been increased in order to deal with the larger-than-expected number of registered firms. The tax rate on hotels and other short-term lodging has been reduced to 3 percent. A major proposed change relates to international services. The taxation of these services will be altered drastically; essentially, the change will make liability for the tax depend on the location of the rendering of the service or the place of business of the user of the service, depending on the type of service. Full input tax credit has been authorized for the previously restricted business expenses, except expenses for entertainment, food, and beverages. Finally, the government has substantially relaxed the requirements for optional registration and use of a simplified form of calculation. One apparent result of these changes is a sharp drop in the delinquency rate. On the whole, the tax is now operating satisfactorily, and the proposed law will not make significant changes in its overall structure. (1997), Vol. 45, No. 2 / no 2 262 CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE Switzerland’s value-added tax (VAT ) (Mehrwertsteuer) came into effect on January 1, 1995. It replaced a single-stage tax (Warenumsatzsteuer) collected partly at the wholesale level but primarily at the retail level.1 The tax was imposed by ordinance, not by a legislative act. BASIC STRUCTURE OF THE INITIAL VAT The VAT has a 6 1 ⁄ 2 percent rate, the lowest of any value-added tax of the usual type. Food and medicine are subject to a 2 percent rate; the few broad exemptions are mostly related to hospital, cultural, and educational activities, and to banking, assurance, and exports. There is no zero rating as such, but in effect exports are zero rated. Farm inputs are taxed, but registered purchasers of farm products may deduct 2 percent of the purchase price—that is, the rough equivalent of the tax element in the price. The threshold for registration is an annual turnover of SFr 75,000, equal to roughly US $56,250 in 1996. Firms with a turnover between SFr 40,000 and SFr 70,000 may register voluntarily. Those with a turnover of less than SFr 40,000 are not accepted for voluntary registration, except in certain special circumstances. Initially, firms with an annual turnover of less than SFr 500,000 were allowed upon request to use a simplified calculation of tax liability. About 70,000 firms requested and received this permission; later, as noted below, the government increased the threshold amount, and the number of firms using the simplified calculation increased. Under the simplified procedure, instead of applying the tax rate to sales and deducting input tax credit the firm applies a designated rate to its gross sales. The designated rates have been calculated on the basis of the typical ratio of input tax to output tax for relatively narrow sectors of the economy. The rates range from 0.5 percent (for dealers in fodder, for example) to 5.2 percent (for hairdressers, for example). Use of the simplified calculation is most prevalent in the services sector. 2 INITIAL PROBLEMS Several years of careful planning preceded the introduction of the tax; nevertheless, some major unforeseen difficulties quickly arose. Number of Firms The number of firms subject to registration for the tax turned out to be far greater than had been anticipated. Under the old sales tax, there were about 140,000 registered firms. The tax administration expected about 80,000 additional registrants; instead, about 130,000 additional firms were found to require registration. Most of these firms were in the service 1 This was reviewed in John F. Due, “The Enactment of a Value-Added Tax in Switzerland” (1994), vol. 42, no. 5 Canadian Tax Journal 1295-1305. 2 The rates are published in a pamphlet entitled (in the French version), Taux dette fiscale nette pour la taxe sur la valeur ajoutée. (1997), Vol. 45, No. 2 / no 2 THE SWISS VALUE-ADDED TAX 263 sector, and most were compulsory, not voluntary, registrants. The unexpected volume of registrations overwhelmed the administrative staff, for which only a 50 percent increase in size had been sought. Delinquency The percentage of registered firms that did not file returns and pay tax was unusually high. In general, Switzerland is a country of highly responsible taxpaying firms; the delinquency was completely out of character. By September 30, 1995, some 40,000 firms had still not filed and paid for the first quarter of the year. This was about 16 percent of the firms liable for filing and paying. For the second quarter, 80,000 had not filed and paid by the required date. To complicate matters, some 7,000 firms paid under protest. The primary complaint was that under the ordinance firms were allowed input tax credit on only 50 percent of tax paid on lodging, meals, travel, car use, and related expenditures—a rule designed to lessen evasion in the form of crediting tax paid on purely personal consumption expenditures. Firms argued that these were necessary business expenditures and that the disallowance of credits violated the constitution. The issue has gone to the Supreme Court, and if the firms win the government must refund the money involved. As of December 1996, the Supreme Court had not acted. An additional complaint was that firms were allowed input tax credit for sales tax paid under the previous sales tax regime only on goods purchased for resale, raw materials in inventory, and goods purchased to be leased or rented, and not on fixed plant or other durable goods used in the business. This distinction created a temporary additional element of cascade or tax occult, to use the Swiss term. Hotels The hotel industry, of great importance in the Swiss economy, sought special treatment under the new tax. Under the previous sales tax regime, there was no tax on hotel charges. The number of overnight hotel stays was 5.5 percent less in the first half of 1995 than it had been over the same period in 1994. There is evidence, moreover, that the number of Swiss taking vacations outside the country has increased by about 15 percent since the tax was introduced. The industry blamed the new tax for a major portion of the decline in its business—though it was recognized that the high foreign exchange value of the franc also played a role in the decline.3 RESPONSES The Swiss government was quick to respond to these problems. Within 10 days of the introduction of the new tax, the National Council (the lower 3 This is attributed primarily to the inflow of foreign capital, stimulated by discussion of a common currency in the European Community. (1997), Vol. 45, No. 2 / no 2 264 CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE house of parliament) established a high-level commission with a mandate to review the tax and make recommendations for a law, as distinct from an ordinance. The commission presented its report,4 together with a proposed law, on August 28, 1996. As of April 1997, the National Council has approved the proposed law, but the Council of the Cantons will act only in the autumn or winter of 1997; thus the law will become effective only in 1998 or 1999. The report was prepared with the assistance of a panel of experts chosen from government, business, and the universities. The first section of the report is devoted to a review and analysis of various aspects of the tax, including such matters as the input tax credit, the treatment of exports and imports, taxable value, self-use of commoditiess (à soi-même), and the tax treatment of the cantons and local governments. The second section is a detailed summary of the submissions to the commission, most of which came from the business sector. Of 246 submissions, 66 dealt with social welfare aspects of the tax; 12 dealt with agriculture, including the taxation of farm equipment; 35 came from associations in various fields; and 21 dealt with services. All of the cantons presented submissions. Some of the submissions dealt with major aspects of the tax, such as its treatment of agriculture and export of services; others dealt with detailed operational aspects, such as the record-keeping and seasonal returns. There was little objection to the overall structure of the tax. The proposed law was presented in full with the report. Pending passage of the law, the government has already modified the ordinance in several respects to meet taxpayer complaints. It has also taken steps to improve and simplify its administration of the tax. Number of Firms The number of registered firms has stabilized at about 270,000—about 130,000 more than were registered under the old tax. The original estimate of 80,000 additional registrants was simply in error. Most of the new firms are in the service sector, which was not subject to the old sales tax. But the experience is significant for other countries. The government has increased the size of the staff from around 350 to 600. Salaries are sufficient to attract qualified personnel, and the high (for Switzerland) unemployment rate of 4.5 percent facilitates hiring. Few of the persons hired are university graduates; most of them have studied in separate technical schools or served as apprentices to accounting and other business firms. Simplified Calculation In order to handle the larger number of firms and meet some complaints about complexity, the government has increased the coverage of simplified 4 Under the title (in French) Initiative: Parlamentaire Loi Fédérale sur la taxe sur la value ajoutée, Rapport de la Commission de léconomie et des redevances du Conseil national. (1997), Vol. 45, No. 2 / no 2 THE SWISS VALUE-ADDED TAX 265 calculation of tax liability. Originally, only firms with an annual turnover of less than SFr 500,000 were allowed to use the simplified calculation. On January 1, 1997, the eligibility figure rose to SFr 1.5 million for firms whose annual tax is less than SFr 30,000. The proposed law would raise the figure to SFr 5 million for firms whose annual tax does not exceed SFr 75,000. Delinquency The delinquency problem noted above has been brought under control. After the second quarter of delinquency, the amount of the tax is assessed on the basis of previous experience and collection procedures are employed. As yet no penalty is applied, though a penalty is authorized by the ordinance. The administration does not have enough staff to track down all delinquencies immediately. The amount of delinquency outstanding has fallen dramatically. By December 1996, only a very small number of 1995 returns, remained uncleared; for the last two quarters of 1995, the number outstanding was only about 1,000. The Hotel Industry The most strenuous complaints against the tax came from the hotel industry, which argued that because of the tax rate of 6.5 percent Switzerland was losing tourists to other countries. There is no strong evidence for this contention, and in fact it seems clear that the chief deterrent to tourism is the Swiss franc’s high exchange rate. Nevertheless, the commission was convinced. As of October 1, 1996, the tax on hotels, holiday flats, and transient lodging generally was reduced to 3 percent. Thus a third tax rate now applies. The tourist industry sought a 2 percent rate, but the government was not willing to go that far. The low rate applies only to transient lodging including breakfast, not to other meals in hotels or elsewhere. Permanent accommodations are not subject to tax. Firms that rent accommodation to registered firms can register voluntarily, so that taxes on the inputs of the latter can provide input tax credit. Input Tax Credit It was noted above that the original ordinance’s restriction of the input tax credit for lodging, entertainment, taxis, car rental, and related items to half of the amount provoked vigorous complaint. Since January 1, 1996, input tax credit has been allowed on all expenditures for business purposes, except expenditures for entertainment, food, and beverages. The Treatment of International Services One of the most criticized features of the tax was its definition of the liability for the taxation of international services, a sector of major importance in Switzerland. Under the original provisions, liability depended basically upon the location of the supplier; as a consequence, services rendered by Swiss firms outside the country were subject to the Swiss VAT unless exempt under certain conditions. The proposed change would bring the treatment of international services closer to that of the European (1997), Vol. 45, No. 2 / no 2 266 CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE Community. For artistic, scientific, educational, sporting, entertainment, and similar services, the liability would depend upon where the services were carried out—that is, on the location of the user of the service, not the location of the supplier. For other services—advertising, consulting, engineers, lawyers, banking, and insurance—liability would depend upon the location of the business for which the services are provided, or basically the domicile of the user. In general, if the invoice is sent abroad, the transaction will be regarded as an export one and will not be subject to Swiss VAT. Optional Registration The proposed changes would liberalize the rule on registration of firms excluded from the tax, since exclusion (in contrast to zero rating) prevents the customers of the firms from gaining full input tax credit. The proposed act extends to sellers of goods and providers of all services except banking, financial, and insurance services the privilege of optional registration, to allow input tax credit. Under the original rules, this option was available only for real estate transactions. Option on Used Goods Under the original ordinance, firms were allowed to calculate the tax liability on used motor vehicles by deducting the purchase price from the sales price, thus taxing on the margin. Under the proposed law, this privilege will be extended to all used goods except precious metals and stones, and real estate. A related change requires travel agencies to pay tax on their margins to the extent that supplies are realized on foreign territory. OTHER FEATURES OF THE TAX Several less important features of the tax can be reviewed briefly. These features do not represent changes in the original structure of the tax. Quotation of Tax Whether the purchaser is a registered firm or not, firms must quote prices inclusive of tax. When the sales price is tax-included, the invoice must show that the price is inclusive of tax by indicating the tax rate, even on cash register receipts. Return Period The standard return period is the quarter. Firms can apply to use a monthly period, which they might do if they were primarily exporters and wanted immediate access to the input tax credit refund. In fact, not many firms have sought monthly returns. In some circumstances, a firm may be allowed to report on an annual basis. Sectors Real Property Real property contracts are fully taxed; the contractor receives input tax credit for tax paid on materials and other inputs used in the contract (1997), Vol. 45, No. 2 / no 2 THE SWISS VALUE-ADDED TAX 267 work. If the owners of the building do not use it for taxable purposes, they essentially bear the burden of the tax. This is true, for example, of residential property. If the building is used for business purposes by registered firms, the owner can opt for registration and apply the tax to the rent; the lessee in turn can receive input tax credit—which he cannot otherwise get. Financial Services The only financial services subject to tax are those for which a direct payment is made—safe deposit, management consulting, and securities management. Transport Services Transport services are fully taxed, and so transport firms are registered. Air transport to other countries is not taxed. In the case of rail traffic to other countries, no tax is applied to export goods; otherwise, tax is applied to the portion of the trip within Switzerland. Private carriers are not subject to tax on the service provided, but they pay tax on inputs and receive no input tax credit. Transport of farm and fish products is taxed at the 2 percent rate if carried out by the supplier himself. Farmers: Optional Registration Farmers can opt for registration, apply tax to their sales, and receive input tax credit. But few have done so—generally only those who have sold their old farms for development and bought new and larger ones, thereby incurring substantial tax on investment in improvements. As was noted above, registered firms that buy from farmers can claim an input tax credit equal to 2 percent of the purchase price. Tourists Tourists can obtain a refund of value-added tax only on purchase invoices in excess of SFr 500. New firms have been established to provide immediate refund when the person leaves the country. Individual Imports Persons who buy goods outside the country and bring them in are nominally subject to tax but in fact are not reached. Cantons and Local Governments By constitutional provision, local governments cannot use any form of sales or value-added tax. They are, however, subject to VAT on their purchases, unless they are allowed input tax credit as registered taxpayers, such as electricity suppliers. CONCLUSION Switzerland is one of a very few countries that have undertaken an overall analysis of the operation of a new VAT soon after its introduction. (1997), Vol. 45, No. 2 / no 2 268 CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE Widespread concern about various features of the tax—despite the care used in developing it—led to pressure to convert the legal basis for the tax from an ordinance to a law (a step never taken with the previous sales tax), in part to permit immediate review of the features of the tax. The commission established to carry out the review received a large number of submissions and prepared both a report, which was released in August 1996, and a new tax act, which has not yet been approved by the upper house of parliament. If the act is approved, the basic structure of the tax and its rates will remain the same, but a number of features will change. Meanwhile, the Federal Council has already made fairly significant changes in the ordinance to meet complaints. The proposed changes will, in general, bring the tax more in line with the VATs of the European Community and (together with changes already made) meet the major criticisms of the tax. The Swiss experience offers several lessons to other countries that have recently introduced a VAT or are considering the introduction of one. One lesson is that the tax treatment of international services requires great care. Another lesson is that of the political necessity, as well as the possible economic importance, of meeting the complaints of major sectors of the economy—in Switzerland’s case, the hotel industry. Still another is that it is important to simplify compliance and eliminate obvious inequities. Finally, it is important to avoid provisions that may be logical but that create widespread opposition and may increase deliberate delinquency—in Switzerland’s case, opposition arose in response to the restrictions on the full deduction of various entertainment and travel expenditures. The overall result of observing these lessons, especially in a very democratic country, is likely to be a VAT that is less than pure but generally acceptable. (1997), Vol. 45, No. 2 / no 2