VAT Revision – What do foreign companies have to consider when selling mail order to Switzerland?

Foreign companies shipping products to Switzerland by mail order need to consider Swiss regulations surrounding VAT, import tax, and customs. This article discusses the revisions made to the Swiss Value Added Tax Act in recent years, particularly as they apply to foreign mail-order companies. The article also provides background on the previous tax laws on parcel shipments to Switzerland and the customs and tax regulations that foreign companies must comply with.

What is VAT?

Value Added Tax (VAT) is a tax that is applied to the value added to goods and services at each stage of their production and distribution. It is a type of consumption tax that is applied as a percentage of the final price paid by the consumer.

The amount of VAT paid by a consumer depends on the rate of VAT applied to the goods or services they are purchasing. Different rates of VAT may be applied to different types of goods or services. In Switzerland, the standard VAT rate is currently 7.7%; however, there are also reduced rates of 3.7% (hotel accommodation) and 2.5% (some foodstuffs, books, newspapers, medicines, etc.). There is also a zero VAT rate applied to certain exports and international services. The aforementioned VAT rates are scheduled to be increased to 8.1%, 3.8% and 2.6% respectively from 1st January 2024.

Businesses that reach certain annual turnover thresholds are typically required to register for VAT. These businesses must charge VAT on their sales and pay VAT on their purchases. They must also regularly file VAT returns which report the VAT they have charged and paid respectively. The VAT amount that the business must pay to the Swiss Federal Tax Administration (FTA) is the net VAT collected, which is calculated as the total VAT charged on sales deducted by the VAT paid on purchases (the “input VAT”).

Brief background on the VAT control process

The VAT control process refers to the procedures and regulations that are in place, both internally and externally, to ensure compliance with Value Added Tax (VAT) laws and regulations. The Swiss tax authorities are responsible for enforcing these regulations. To ensure compliance, the tax authorities conduct audits and inspections of businesses that are subject to VAT.

The specific VAT control process may differ from country to country, and the individual requirements of the company in question, but it generally includes the following stages:

1. Registering for VAT: the VAT control process begins with the company registering for VAT with the relevant tax authorities. In Switzerland, this would be the Swiss FTA.
2. Proper invoicing: the company must include the correct VAT rate when they issue invoices, along with any other information required by law.
3. Accurate recording of VAT: the company must keep an accurate record of all sales and purchases for which VAT is received and incurred.
4. Reconciliation (internal checks): the VAT records should be checked against the financial statements, and any discrepancies should be identified and corrected.
5. Reporting VAT to the FTA: the company should then report their VAT liability and claim their input VAT credits with the FTA. Reporting is done on either a quarterly or monthly basis depending on the annual turnover of the business.
6. Payment of VAT: the company must then pay the net VAT owed to the FTA by the due date.
7. Ongoing compliance: as time goes on, the company must take steps to ensure they are up-to-date and compliant with all VAT regulations, including any revisions or updates which take place.
8. External audits: the business may be required to undergo periodic external audits to ensure that their financial records and VAT reporting is accurate and compliant with the relevant laws and regulations. An audit of a business’s VAT records can help to identify any errors or discrepancies in the VAT control process.

Import sales tax on international mail order to Switzerland

Before we explore the important revisions and updates to the Swiss Value Added Tax Act, it is appropriate to give a brief background on the tax laws which previously applied to international mail-order companies shipping to Switzerland. We make specific reference to the case of small consignments.

Switzerland’s customs regulations and shipping conditions

E-commerce merchants who ship products to Switzerland via dropshipping, Amazon FBA, or their own online store abroad are confronted with Swiss VAT. In addition to VAT requirements, foreign companies must also comply with Switzerland’s customs regulations and shipping conditions. This includes requirements for import declarations, customs clearance, and shipping documentation.

Since Switzerland is in the middle of Europe, many European online retailers do not consider that special shipping conditions apply to parcel shipments to Switzerland. They either forget or are unaware of Switzerland’s customs regulations.

International online retailers must also ensure that the respective VAT regulations of all countries where the store operates are observed. Failure to do so can cost both customers and online retailers significant time and money.

Previous tax laws on parcel shipments to Switzerland

Shipments of products to Switzerland are subject to import sales tax. This sales tax is incurred when goods are imported from abroad into Switzerland. However, Switzerland previously waived import sales tax on small consignments with a tax value of 5 Swiss francs (CHF) or less. This means that a package of goods taxed at the standard VAT rate of 7.7% was only subject to import tax if its value was CHF 65 or more (or CHF 200 at a tax rate of 2.5%). Until now, this has given foreign online retailers dealing with small shipments a competitive advantage over domestic Swiss companies.

Partial revision of the Value Added Tax Act 2016: What do you need to know?

In this section, we examine the revisions that Switzerland has made to its VAT laws in recent years, the reasons for the changes, and the implications they have had on both international and domestic companies.

Background

The revisions to the Swiss Value Added Tax Act were initiated in February 2015, when the Federal Council proposed changes to VAT laws with respect to tax liability, tax exemptions, and regulatory and reporting procedures. The main purpose of the proposals were to remove the unfair competitive advantage of foreign companies over domestic companies due to the exemptions which were previously granted.  

Parliament passed the partial provisions in September 2016 and thereby improving the competitiveness of domestic companies. The amendments of the revised VAT laws came into effect in January 2018 and 2019.

Who must register for VAT?

Since January 2018, all businesses that are either domiciled in Switzerland or provide services in Switzerland and generate at least CHF 100,000 in turnover per year from taxable and tax-exempt services in Switzerland and abroad are obliged to register for and pay VAT. Previously, only domestic turnover was taken into account for the VAT obligation.

Delivery thresholds for small consignments

Under the revised laws, small consignments below the previously discussed limits are still exempt from import sales tax. However, since 1st January 2019, these exemptions are only given to companies that do not exceed a total delivery threshold of CHF 100,000 per year. Foreign companies that exceed the delivery threshold are required to register for Swiss VAT and charge VAT on their sales. The delivery threshold is calculated based on the total value of goods that a foreign company delivers to Swiss customers in a calendar year, including both taxable and non-taxable goods, as well as the so-called “small consignments”.

Foreign companies that deliver less than CHF 100,000 in goods to Swiss customers in a calendar year are not required to register for Swiss VAT. In this case, they will only be required to pay import sales tax on shipments above the previously defined limits (of CHF 65 and CHF 200 respectively).

Impact on foreign mail-order companies

The revised VAT laws have had a significant impact on foreign mail-order companies that sell goods to Swiss customers. Under the old system, many foreign companies were able to avoid registering for Swiss VAT and were exempt from paying import sales tax on all their small shipments, regardless of the annual turnover. However, under the revised laws, foreign companies are now required to register for VAT and charge VAT on their sales if they exceed the delivery threshold.

This has led to increased compliance costs for foreign companies, as they must now register for Swiss VAT and file VAT returns. These companies must also ensure that they accurately report their sales to the FTA.

Revisions lead to improved competitiveness of domestic companies       

The revised VAT laws have leveled the playing field between foreign and domestic companies. Prior to the revised laws, foreign companies that did not register for Swiss VAT were able to sell goods to Swiss customers at lower prices than domestic companies, as they did not have to charge VAT.

However, under the revised laws, foreign companies that exceed the delivery threshold are now required to register and charge VAT on their sales. This has increased the prices of goods sold by foreign companies, therefore making domestic companies more competitive.

What is a fiscal representative?

A fiscal representative (aka tax representative) is a natural or legal person who acts as an economic operator for a foreign VAT-liable company that has neither a place of residence nor a place of business in Switzerland (including customs territory). The representative ensures contact with the tax authorities or the Federal Customs Administration and assumes all obligations in this regard.

Who needs a fiscal representative in Switzerland?

If a foreign mail-order company meets the requirements for tax liability, it must register with the Federal Tax Administration (FTA). Doing so requires a fiscal representative with a place of residence or business in Switzerland. In addition, security must be provided in the form of an unlimited “joint and several” guarantee from a bank domiciled in Switzerland or a cash deposit. If the company meets the requirements for tax obligations, regular submission of VAT returns is mandatory.

Why should foreign mail-order companies register for VAT in Switzerland?

First and foremost, foreign companies that sell goods to Swiss customers and exceed the delivery threshold are legally required to register for VAT. Failure to do so can result in fines and penalties.

Registering for VAT also has its benefits. A company that exceeds the delivery threshold of CHF 100,000 owes Swiss VAT on all its deliveries to domestic customers, including both small consignments and consignments subject to import tax. Registering and paying for VAT enables the mail-order company to deduct the import tax it incurs (as it is considered an importer) and all other input taxes incurred during its business activities, such as input VAT. Foreign companies that are not registered for VAT are not entitled to claim back any Swiss VAT that they pay on their expenses.

What are the consequences of not registering for Swiss VAT?

The Swiss Federal Tax Administration (FTA) may impose penalties if a company is liable for VAT in Switzerland but does not comply with the tax obligation. Negligent non-declaration can result in fines of CHF 10,000 to CHF 400,000. In the case of intentional non-declaration, the FTA can impose a fine of up to twice the amount of the tax obligation.