Activities in Switzerland might trigger Swiss VAT liability for foreign businesses. What is obvious for “normal” taxpayers, often goes unnoticed in the financial industry.
VAT compliance often forgotten
The beginning of the year usually means the busy season in the financial industry. Year-end closings, annual reports, tax returns, etc. do not leave a lot of time for other topics. No wonder VAT compliance is not the main point on the agenda of a financial or tax director. Even less so if the business is not registered for VAT in Switzerland or operates through a branch – why bother then?
A typical financial business, for example insurance, is exempt from VAT in the main jurisdictions of the world. It means that no VAT is charged to clients (in casu: policy holders) and no input VAT on costs can be recovered, either. If such business is carried out in Switzerland primarily from overseas or through a Swiss branch, a VAT registration is indeed not necessary and sometimes not even possible in Switzerland. Yet, Swiss VAT under a so called “reverse-charge” mechanism might become due.
Reverse-charge in insurance business
The reverse-charge liability in the insurance business will typically arise for inter-group or inter-company services purchased / received by a Swiss-based company / branch from a foreign, related entity, head office or branch. The internal recharges or allocation of costs – even if made without payment – would be considered as well, as for VAT purposes they are seen as a provision of services. The “arm’s length” principle requires that a market price is considered as a payment for VAT purposes in such cases.
Proper qualification for VAT purposes
Of the particular importance are services effected within the same legal entity (i.e. from the head office to the branch and vice versa). If such services are carried-out on a cross-border level, Swiss VAT legislation would treat them as a “normal” supply of services even if legally these are mere internal activities. The Swiss VAT rules differ significantly from the EU VAT treatment on that point and, as a result, the so-called “head office-branch disregard” is not applicable in Switzerland.
Once the amount of the services purchased / received is known, the services need to be split into VAT exempt and taxable. Such a distinction requires thorough consideration, as the Swiss Tax Authority tends to treat many of the received / bought services as taxable even if they relate to costs for core insurance activities such as e.g. underwriting, actuarial, sales support. VAT exempt services, on the other hand, are not subject to the reverse-charge mechanism.
Declaration and deadline
For companies / branches not registered for VAT purposes, VAT of 8% is due on the amount of the taxable services received or purchased from abroad in a calendar year as long as these exceed CHF 10’000. There is no separate VAT return form available for reverse-charge declaration and taxpayers need to make the declaration to the Tax Authorities e.g. by means of a letter. This self-declaration and payment of VAT due amount needs to be done by 28 February following the year the services were received or purchased (e.g. for services received in 2014, the deadline will be 28 February 2015). Late declaration and payment could lead to penalties and late payment interest of currently 4% p.a.
It goes without saying that the reverse-charge declaration is only one of the few compliance obligations the financial industry faces at the beginning of the year and, perhaps, not the most important one. However, proper and timely evaluation of taxable and VAT exempt services might not only mitigate the risks of penalties but also provide some guidance on how the group-internal recharges of costs should be streamlined, thus improving the costs transparency for the whole business. Therefore, 28 February should definitely be highlighted in the financial or tax director’s agenda.