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.
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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.
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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.
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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.
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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.
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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
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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
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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.
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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.
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