The revision of the Swiss VAT Law (VATL) passed by Parliament in 2016 came into force for the most part on 1 January 2018; however, foreign distance sellers of dispatched goods have not felt any effects until 1 January 2019. With the de facto abolition of the tax exemption for small consignments and low-value goods, foreign distance selling companies will no longer have a competitive advantage over domestic competitors.
Small consignments are defined as consignments that would trigger a tax of CHF 5 or less. The tax amount of CHF 5 corresponds to a goods value of CHF 65 for goods that would be taxable at the standard rate and CHF 200 for goods that would benefit from the reduced rate (e.g. magazines). If a foreign seller of such items achieves an annual turnover in the Swiss market of more than CHF 100,000, he will be obliged to register for VAT in Switzerland and hence, declare the turnover to the Swiss Federal Tax Administration (FTA) and pay VAT at 7.7% standard rate or 2.5% reduced rate.
Read the following article by our VAT specialist Heinrich Spühler on the new mail order regulation (from 1.1.2019) and see what effects the "Lex Amazon" will have on the affected customers and players involved.
In fact, up to now foreign distance sellers (e.g. Amazon) could "choose" whether they wanted to import goods into Switzerland in their own name (and thus become taxable) or whether the end customer should act as an importer (and import tax payer). The ratio legis of the partial revision of the VATL was to close the gap in the law that allowed foreign distance sellers - i.e. by random portioning and splitting of deliveries - to create small consignments within the meaning of Art. 53 VATL and thus, depending on the economic good, automatically (and in addition to the currency advantage) to achieve a margin advantage of 7.7% or 2.5% compared to domestic competitors. The "Lex Amazon", as this measure is also called, is not a Swiss phenomenon, but corresponds to what is to be implemented in the EU with the measures adopted on 5.12.2017 to amend the VAT system directive as of 1.1.2021. The situation is even more accentuated in those countries with high VAT rates (up to 25%), where local traders have to suffer significant margin disadvantages compared to tax-exempt overseas traders.
What does the Swiss distance selling regulation mean for foreign distance sellers with customers in Switzerland?
If they exceed the annual turnover threshold of CHF 100,000, they must register for Swiss VAT in the following month and, like other taxable persons, declare (and pay) the corresponding VAT to the FTA (and in return claim input VAT in relation to their taxable business activities). However, it is important to take notice of the following consequences:
- Foreign companies that exceed the above annual turnover limit in the 2018 tax period are already subject to registration or tax in Switzerland from 1.1.2019 onwards, not only when the turnover threshold is reached in 2019 (subject to voluntary VAT registration, which would also be possible today, with retroactive effect from the beginning of 2018).
- Once the VAT obligation has been met, the foreign Swiss VAT liable distance seller must charge (pass on) Swiss VAT to his Swiss customers. However, if the dealer's margin remains the same, the additional VAT charge leads to a price increase. From a systematic point of view, this is domestic tax, which is why the tax base is not based on the import tax value, but on the delivery value (value including all services until consumption by the end customer). Hence, if taxable small consignments to Swiss customers are undervalued, this has no influence on the VAT obligation (delivery value), but has consequences under Customs and Criminal Tax Law for the invoicing party or for any persons entrusted with the customs declaration and who are responsible for such a violation of the law. Double caution is therefore required, both with regard to the customs declaration and with regard to the correct VAT treatment on the invoice. At the beginning of 2019, the FTA will publish a list of all foreign sellers who are liable for Swiss VAT. In particular, this list is intended to provide assistance to personnel who (newly) make customs declarations for foreign taxable mail-order companies.
- If the aforementioned annual turnover threshold is exceeded in Switzerland, it should be noted that taxable mail-order companies must also declare their domestic and foreign turnover to the FTA - and not just their Swiss turnover.
- In addition to the FTA, the major freight forwarding and parcel delivery services will probably also create databases with similar shipping information in future in order to enable their customers to process shipments to Switzerland (or from Switzerland to abroad) efficiently and correctly.
As just explained, the new regulation entails a number of obligations for foreign distance sellers. Probably too many!? According to Amazon.com's latest announcement, the deliveries of goods to Switzerland will be stopped on 26 December 2018. In fact, the new Swiss VAT regulation would mean to large distance-selling companies that they would have to register and maintain Swiss VAT and Customs data for millions of items - even for those that would hardly ever be demanded (bought) in Switzerland. Thus, the fact that a company thinks about (partially) withdrawing from the market on the basis of such cost/benefit considerations is reasonable.
So did the "Lex Amazon" achieve its goal? Basically YES, because it ultimately achieved the goal of strengthening the market position of local competitors (i.e. with collateral damage concerning the diversity of goods available on the Swiss market); but NOT with regard to digital goods and so-called electronic services such as e-books, music downloads, apps etc., which are sold to non-registered Swiss customers (B2C) and which are covered by Art. 10 para. 2 VATL (see below).
What about the relationship between the Swiss VATL changes and the EU VAT regulations in the neighbouring EU countries?
The fact that a global playing distance seller (like Amazon) recommends their Swiss customers to order goods previously purchased in the USA via other European group companies, might lead to the conclusion that there are no similar distance selling regulations in the EU that would protect the local trade of goods from the above-mentioned margin disadvantages?
It all appears to be deceptive. A look across the national border shows that innovations in the EU VAT Law are also imminent in the EU, but will only take effect later, from 1.1.2021, and in particular also regulate the distance selling business. In the EU, the existing legal loopholes in distance selling will be closed for the same reasons as in Switzerland. And in fact, the first step was already taken with EU-wide measures to standardize the treatment of electronic services, which are now to be extended analogously to physical deliveries. These innovations provide for uniformly low delivery and service turnover thresholds in the member states and (counterpart, as a relief) the application of the one-stop shop regime for traders who are or become subject to VAT and registration in several EU member states once the turnover threshold has been exceeded.
This analogy regarding the establishment of tax liability for foreign companies can also be seen in Switzerland where the implementation, however, took place in the reverse order: Foreign companies that provide electronic services to non-taxable end customers in Switzerland (so called B2C transaction) must register for Swiss VAT and hence, invoice their end customers for Swiss VAT accordingly (Art. 10 para. 2 lit. b No. 2 MWSTG, in force since 1.1.2018). In principle, similar mechanisms will one day also operate in the EU in order to avoid disruptive competition and unequal treatment between domestic and foreign traders.
Finally, it also appears that global distance sellers - from a group perspective - indirectly pay Swiss VAT even if the goods arrive in Switzerland via their EU national companies (as the latter will become liable for Swiss VAT). What remains exciting, however, is the recommendation such mail order groups will make to their Swiss customers when EU-wide mail order regulations in the style of the "Lex Amazon" come into force in 2021.
What impact will the new Swiss VAT regulation have on Swiss customers?
If a foreign distance seller becomes (new) taxable in Switzerland as a result of the changes in swiss VATL, it must charge VAT to its Swiss customers. If the margin remains the same, this would (i) lead to a price increase due to the surcharge for local VAT (i.e. 7.7% or 2.5% depending on the economic good) and (ii) if the not inconsiderable costs of administrative processing are passed on, this would lead to a price increase or otherwise put pressure on the margin. It remains to be seen whether foreign mail order companies will be able to pass on such price increases, accept them at the expense of their margins or even decide to withdraw from the Swiss market. After all, with the new regulation, customers will no longer become the pawn of distance-selling companies, i.e. they will no longer arbitrarily become importers (subject to import tax) - as long as foreign mail-order companies behave correctly (see below). In addition, customers can now compare offers from home and abroad more transparently. Finally, there is hope that fairer competition will stimulate the domestic demand and domestic traders’ sales volumes and consequently, lead to more attractive prices (even in the domestic market), which should compensate the above-mentioned price increase on foreign small quantities from a customer’s perspective.
But what if the foreign – Swiss VAT liable – distance seller denies to VAT register in Switzerland?
Particularly in such case and for lack of available seller-data, it is possible that the Swiss customs declaration will be issued and Swiss import VAT charged to the buyer (or the first Swiss recipient). However, this risk predominantly exists where the selling party does not explicitly appoint or contract the declarant directly (as for example mails handled by the Swiss Post) and where only the recipient’s address is available. In general, the risk of import tax liability is higher the less experienced the selling companies or the involved customs declarants are with regard to Swiss VAT and Customs. In order to prevent such risks, the authorities are developing mechanisms that will allow in the future to stop and block non-compliant shipments at the border. This with the aim get customers of blocked shipments to switch to customs-experienced foreign selling companies or as a consequence, chose their goods from Swiss domestic suppliers.
The “Lex Amazon”, effective from 1.1.2019, has already triggered surprising reactions these days. However, it remains exciting to see to what extent the introduction of the European counterpart (changed EU VAT Law) influences the distance dispatch selling industry and how the combined interaction of the new VAT regulations will change the global flows of goods.
Heinrich Spühler, lic. iur., LL.M. International Tax Law
SwissLegal (Zurich) AG
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