The partial revision of Switzerland’s Value Added Tax Act, finalized by the Federal Parliament in June 2023, will come into force on 1 January 2025. The Federal Council has confirmed the date and published the updated version of the Value Added Tax Ordinance.
The main features of the partial revision of the VAT Act concern the taxation of e-commerce platforms and merchants trading on these platforms (see article in this issue of Indirect Tax News), as well as changes to the tax treatment of travel agencies/tour operators. However, the legislator has taken advantage of the revision to introduce a number of changes that may impact businesses, in particular, small and medium-sized enterprises (SMEs).
The Net Tax Rate method (NTR), a simplified VAT reporting method for SMEs, has undergone a radical overhaul. To prevent the distortion of competition and loss of tax revenue, the Federal Council has introduced limitations on the tax planning possibilities offered by the NTR method and the flat-rate method.
The VAT ordinance allows input tax deductions to be corrected in the event of a change in reporting method to prevent changes motivated solely by tax optimization. Thus, if there is a change from the effective reporting method to the NTR method, input tax previously deducted on goods and services must be repaid to the federal tax authorities (FTA) based on its residual value at the time of the change. On the other hand, if there is a change from the NTR method to the effective reporting method, the VAT on goods and services may be deducted as input tax in the reporting period following the change, based on the residual value of the input tax at the time of the change. Moreover, the number of applicable rates for NTR purposes will no longer be limited to two per taxable person; each activity exceeding 10% of total sales must be reported and taxed using the NTR applicable to that activity.
These changes, combined with the known drawbacks of the NTR method (inability to reclaim input tax on purchases, the turnover threshold, final VAT burden of the reverse charge, etc.) will make this reporting method (even) less attractive and more complex to use.
It therefore may be the right time to consider a switch to the effective reporting method. Taxable persons wishing to continue using the NTR method should analyze their activities and ensure that any activity exceeding 10% of their total turnover is reported at the correct NTR. This will potentially require the use of new NTR, which will have to be determined and then validated by the FTA.
It should be noted that foreign taxpayers will no longer be able to use the NTR: a change to the effective reporting method is mandatory as from 1 January 2025, with the corrections mentioned above.
The transfer of emission rights, emission reduction certificates, guarantees of origin for electricity and other similar rights and certificates will be subject to the mandatory reverse charge mechanism, even between two Swiss companies (i.e., the domestic reverse charge). However, if VAT has been invoiced at the time of the transfer, it cannot be deducted as input tax, unless it has been settled and remitted by the supplier to the VAT administration.
Companies that are not e-commerce platforms or merchants operating on these platforms, nor travel agencies or tour operators, are affected by the partial revision of the VAT Act. While annual VAT reporting will be a welcome administrative relief and offer SMEs more flexibility, the NTR method will no longer be of considerable interest. A shift to annual reporting and the effective method on 1 January likely will benefit many SMEs.
Nic Weber
BDO in Switzerland
The main features of the partial revision of the VAT Act concern the taxation of e-commerce platforms and merchants trading on these platforms (see article in this issue of Indirect Tax News), as well as changes to the tax treatment of travel agencies/tour operators. However, the legislator has taken advantage of the revision to introduce a number of changes that may impact businesses, in particular, small and medium-sized enterprises (SMEs).
Annual VAT reporting
As from 2025, SMEs with turnover of up to CHF 5 million per year will be able to report VAT annually, a welcome reduction of the administrative burden for these businesses. Quarterly or half-yearly instalments, calculated on the basis of the previous year's tax claim, will nevertheless be due. Taxpayers wishing to switch to annual VAT reporting from 1 January 2025 must submit an application by the end of February 2025.
Modifications regarding the net tax rate method
The Net Tax Rate method (NTR), a simplified VAT reporting method for SMEs, has undergone a radical overhaul. To prevent the distortion of competition and loss of tax revenue, the Federal Council has introduced limitations on the tax planning possibilities offered by the NTR method and the flat-rate method.The VAT ordinance allows input tax deductions to be corrected in the event of a change in reporting method to prevent changes motivated solely by tax optimization. Thus, if there is a change from the effective reporting method to the NTR method, input tax previously deducted on goods and services must be repaid to the federal tax authorities (FTA) based on its residual value at the time of the change. On the other hand, if there is a change from the NTR method to the effective reporting method, the VAT on goods and services may be deducted as input tax in the reporting period following the change, based on the residual value of the input tax at the time of the change. Moreover, the number of applicable rates for NTR purposes will no longer be limited to two per taxable person; each activity exceeding 10% of total sales must be reported and taxed using the NTR applicable to that activity.
These changes, combined with the known drawbacks of the NTR method (inability to reclaim input tax on purchases, the turnover threshold, final VAT burden of the reverse charge, etc.) will make this reporting method (even) less attractive and more complex to use.
It therefore may be the right time to consider a switch to the effective reporting method. Taxable persons wishing to continue using the NTR method should analyze their activities and ensure that any activity exceeding 10% of their total turnover is reported at the correct NTR. This will potentially require the use of new NTR, which will have to be determined and then validated by the FTA.
It should be noted that foreign taxpayers will no longer be able to use the NTR: a change to the effective reporting method is mandatory as from 1 January 2025, with the corrections mentioned above.
Reverse charge on the transfer of emission rights and similar rights
The transfer of emission rights, emission reduction certificates, guarantees of origin for electricity and other similar rights and certificates will be subject to the mandatory reverse charge mechanism, even between two Swiss companies (i.e., the domestic reverse charge). However, if VAT has been invoiced at the time of the transfer, it cannot be deducted as input tax, unless it has been settled and remitted by the supplier to the VAT administration.
Comments
Companies that are not e-commerce platforms or merchants operating on these platforms, nor travel agencies or tour operators, are affected by the partial revision of the VAT Act. While annual VAT reporting will be a welcome administrative relief and offer SMEs more flexibility, the NTR method will no longer be of considerable interest. A shift to annual reporting and the effective method on 1 January likely will benefit many SMEs.Nic Weber
BDO in Switzerland