TAX NEWS - 2010

Switzerland VAT: Switzerland Unveils VAT Reform

The Swiss Federal Council has adopted a supplementary bill pertaining to the simplification of the value-added tax (VAT) system in Switzerland.

The package provides that the three existing rates will be replaced by a single rate while the majority of exemptions will be abolished. Efforts to simplify the system in such a way are designed to strengthen the Swiss financial centre, to stimulate growth and to increase prosperity.

The first part of the Switzerland VAT reform, the new Switzerland VAT law (la nouvelle loi sur la taxe sur la valeur ajoutée - LTVA), which has been in force since the beginning of the year, aims to improve legal security for those businesses subject to the tax. The introduction of a single, uniform rate of 6.2% and the abolition of most of the existing tax exemptions (21 out of a possible 29), will serve to further simplify Switzerland VAT by removing problems associated with highly complex delimitation issues. It was during the adoption of the first part of the reform, that both the Swiss National Council and State Council elected to profoundly modify the Federal Council's initial draft, as well as the conditions necessary for the introduction of a single rate and for the removal of certain exemptions, reflected in the latest bill.

Although the second part of the reform will certainly increase the amount of VAT levied on food and soft drinks, as well as on certain services (cultural, sports, training, accommodation and health), consumers will nevertheless benefit from a reduced burden arising in other areas, notably on public transport, electrical goods, cars, furniture, clothing, petrol, oil and dining out. According to the Federal Administration, household spending on food and soft drinks currently accounts on average for around 7% of overall spending, whereas spending on transport and communications is constantly rising and currently constitutes 12% of the average household budget.

A single, uniform rate of VAT in Switzerland is designed to ensure transparency and equality of treatment in all economic sectors and interest groups. It removes the difficulties involved in defining, for example, which services should be taxed at a standard rate and which should be accorded a reduced VAT rate. A single rate will also serve to simplify VAT declarations for businesses providing services that are taxed at sometimes two, and often three different rates of VAT.

Regarding the abolition of exemptions, 21 out of the 29 existing tax breaks will be abolished. Exemptions have only been maintained in cases where abolishing them would not prove profitable, or in cases where it is not technically possible to accurately determine the tax base. Consequently, exemptions will remain in place for the following products and services:

- Financial and insurance services;
- Lottery and betting games, along with other gambling games;
- The renting and selling of buildings;
- Natural products (agricultural and forestry products, for example); and
- Services within the same public group.

According to a study conducted by the economist Frank Bodmer, the introduction of a single VAT rate and a reduction in the number of exemptions will produce, in the long term, additional GDP growth of between 0.3% and 0.8%. The effect of these measures on actual household income is also expected to be positive, with, in the long-term, an additional increase of between 0.1% and 0.7% anticipated.

The Federal Administration says that, as a result of the second part of the reform, Switzerland VAT will be more transparent and less likely to skew competition. Given that the single rate and fewer exemptions will eliminate costly problems associated with delimitation, businesses concerned will be able to reduce their prices and increase their sales accordingly, it notes.

A study commissioned by the State Secretariat for Economic Affairs (SECO) revealed that such a move could serve to reduce the administrative burden on the economy by as much as 11% when compared to the introduction of the new VAT law. For some companies, these reduced administrative costs could even be as much as 18%.