December 17, 2018 Switzerland | Global turnover reporting could lead to VAT exposure With the coming into force of the new Swiss Value Added Tax (VAT) Law, the Swiss Federal Tax Administration (SFTA) has gradually updated its official guidelines on a number of topics. In their guidelines outlining VAT reporting obligations, this has resulted in a significant change of practice with respect to how legal entities with branches in multiple jurisdictions are viewed from a Swiss VAT perspective. In the past, the Swiss practice has been relatively clear on two points:
As a result of this position, a foreign branch doing business in Switzerland could end up having to register for Swiss VAT separately from its Swiss HQ. The update to the SFTA guidelines suggests that while the Swiss dual entity principle still applies, a distinction is to be made between the activities of the HQ/branch in Switzerland and those of any establishments in the rest of the world. While the "dual nature" of the entities is thus still recognized from a Swiss perspective, ironically, the new practice suggests that branches located in different foreign jurisdictions are essentially all viewed as one non-Swiss taxable person. On initial consideration, this may not seem like a change with far-reaching implications, as the primary aim of the amendment appears to be to target the newly instituted requirement for foreign taxpayers to report their global turnover in the Swiss VAT return. The potential significance for legal entities with branch structures should however not be under-estimated, considering some of the crucial differences between Swiss and European Union VAT legislation. In this context, the most notable of these differences is the fact that the Swiss VAT system does not recognize the so-called non-established entity principle. This means that once a legal entity is registered for VAT in Switzerland, it has to charge and account for VAT on any supplies of goods or services to Swiss recipients - including business to business (B2B) service supplies that would otherwise have been subject to the reverse charge mechanism. This paired with the new requirement on a foreign entity to report the global turnover of all of its establishments in the Swiss VAT return, effectively leads to an obligation to charge Swiss VAT on any services rendered by e.g., branches that have no involvement in the activities that lead to a Swiss VAT registration at all. The below example is intended to illustrate how the new practice could lead to significant Swiss VAT liabilities for non-established entities with branches in multiple jurisdictions, as a result of activities performed by one of these branches.
In the above example, a US HQ has branches in Paris, London and Hong Kong. As a result of trading in precious metals in Switzerland, the London branch is obliged to register for Swiss VAT. Unbeknownst to the London branch, the branch in Paris is providing B2B services to clients in Switzerland. In the past, only the London branch would have had to charge and report Swiss VAT with respect to certain metal trading activities. As a result of the new practice however, the London branch is obligated to report its global turnover in its Swiss VAT return. Implicitly, any services rendered by other branches or the HQ suddenly fall within the scope of reportable transactions in Switzerland. The supplier being registered for Swiss VAT through its London branch, it is the obligation of the supplier to charge and report Swiss output VAT on these supplies. Failure to do so could result in a significant Swiss VAT liability being accumulated over the course of time. Consequences for businesses and next steps If the SFTA strictly upholds their new practice, it is likely to have significant ramifications for businesses in legal structures that have branches, and where one of the non-established entities has a Swiss VAT registration. These changes have not been widely announced and have to the best of our knowledge not yet been tested in a situation involving B2B provision of services. Therefore, at this stage businesses should perform an impact assessment to determine to what extent they could be affected. In terms of safeguarding against potential reassessments, there are two options:
——————————————— For additional information with respect to this Alert, please contact the following: Ernst & Young AG, Indirect Tax Services, Zurich
——————————————— PDF version of this Tax Alert
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