In 1995, Switzerland introduced its VAT system. Therefore Swiss VAT is turning 25 this year. However, the system as it stands today has undergone extensive renewals over the years. Deloitte Indirect Tax team values the achievement of the many amendments introduced and herewith starts with a series of blogs providing interesting facts around particular topics, which we hope you will enjoy reading.
Our first blog of the 25 years series takes a look at the impact of digitalisation in VAT. The progress of digitalisation has triggered various VAT developments for businesses providing electronic services in Switzerland. The VAT Division of the Swiss Federal Tax Administration (“SFTA”) is facing technical questions related to e-services and how these operations should be taxed (qualification, place of supply, VAT rate, etc.), and is forced to update its practice regularly.
What are we looking at?
Who would have thought, in 1995, that 25 years later it would be normal to buy books in an electronic format, listen to music and stream movies online, or to take web-based distance courses? With the democratization of technology and dematerialization of services, existing businesses are shifting towards electronic services and an increasing number of new businesses are entering the digital market.
This, combined with the fact that since 2018, foreign businesses have the obligation to register for Swiss VAT from the first service provided to a non-VAT registered persons in Switzerland (B2C), explains the rapid increase in past few years of the number of electronic service providers registered for VAT purposes in Switzerland.
What are the changes / clarifications?
As a consequence to this new development, new challenges have arisen from a Swiss VAT perspective. Here are a few examples of technical questions that the SFTA has tackled over the past years/months.
- Qualification of the supply
For example, the sale of physical books will undoubtedly be qualified as a supply of goods from a VAT perspective. But what happens when books become e-books? In 2018, the SFTA confirmed that the sale of e-books is to be considered as e-services. The qualification may however be more difficult in practice like for the online learning and distance courses. The question whether these qualify as VAT exempt educational services or taxable e-services depends on how the program is delivered, the human interaction, the technology used, if exercises are corrected by the teacher, etc.
As a general response to the current trend, the SFTA published a draft mid-2019 to introduce a detailed definition of e-services, which aims to clarify the practice and establish legal certainty in this respect. The definition is based on three cumulative conditions for services to be qualified as electronic:
- The service must be provided through the internet or another electronic network;
- The provision of the service must be automated and there must be minimal human intervention of the supplier;
- The service could not be provided without information technologies.
A detailed list of examples of services considered as electronic services is also available.
- Place of supply, VAT registration and attraction principle
As opposed to supplies of goods, supplies of services follow different place of supplies rules. E-services are taxable as per the general rule; i.e. at the place of the beneficiary (art. 8 par. 1 VATL), which triggers a VAT registration as from the first B2C supply (provided the supplier has a worldwide annual turnover exceeding CHF 100k). Once VAT registered, the provider has to charge Swiss VAT on all e-services including B2B!
- VAT rate
The nature of the supply also defines the VAT rate applicable. New provisions were thus introduced on 1 January 2018 in the Swiss VAT Ordinance regarding the applicability of the reduced VAT rate to e-books without advertising purpose (subject conditions).
What is next?
Businesses entering in the digital market in Switzerland should be aware of the various VAT questions surrounding the provision of e-services and take the appropriate actions.