More flexibility, greater choice and much more – international trade offers many advantages. But despite all these benefits, the system also has its pitfalls. If you want to enjoy the advantages of imported services, this unfortunately also means that you have to take into account the bureaucratic conditions in other countries. To ensure that the effort involved does not outweigh the benefits and to protect the domestic economy, the reverse charge mechanism – or in Switzerland the input tax on services (Bezugsteuer) – was introduced.
Definition of the reverse charge mechanism
Under the reverse charge mechanism, the VAT liability for cross-border supplies is reversed. In plain language, this means that services are taxed where the recipient of the service has its head office. Under VAT law, service providers must show VAT on invoices and pay it to the tax authorities. If the reverse charge mechanism applies, this changes.
In this case, service providers issue a net invoice, the recipient of the service calculates the VAT and then pays it to the tax authorities. The reverse charge is therefore also referred to as the reversal of the tax liability.
Origin of the reverse charge mechanism and the Swiss input tax on services
Before the reverse charge mechanism as it exists today was created, there was already a directive aimed at the harmonisation of VAT legislation. The VAT systems of the EU member states were to be aligned. Since then, this directive has been revised and updated several times. The reverse charge mechanism has evolved from this initial directive.
Today, not only EU countries but also third countries such as Switzerland have VAT rules. In Switzerland, this is known as the input tax on services (Bezugsteuer). The input tax on services is the VAT levied on imports of services and is regulated in the Swiss VAT Act (MWSTG).
The standard tax rate is 7.7%. Important here: input tax on services deals with services. When it comes to the import of products, we speak of import tax.
Input tax on services: requirements
In general, the Swiss input tax on services works in a similar way to the reverse charge mechanism applied in Germany and the EU. The differences between the regulations here primarily concern the definition of the scope of services. There are stricter rules on which services a foreign company can subject to input tax in Switzerland.
Whether a recipient of services pays input tax is generally dependent on two aspects:
- Place of supply of the service – According to Article 45 of the Swiss VAT Act, only services that, under the place-of-recipient principle, are provided by businesses established abroad to customers in Switzerland are subject to input tax. This applies, for example, to advertising services, the purchase of rights and licences, consulting services and electronic services such as website creation.
- Tax liability of the service provider – It is assumed that services are provided by a foreign, non-taxable company to a VAT-liable customer. This is the case in B2B transactions. If the recipient of the service – whether a natural or legal person – is not registered as a taxable person, they only pay input tax if they receive annual services worth more than CHF 10,000. This can affect both B2B and B2C transactions. There is no exemption threshold of CHF 10,000 – input tax is owed on all imported services as soon as this threshold is exceeded.
Special rules for Swiss input tax on services
As already mentioned, the scope of services is defined more strictly in Switzerland than within the EU. One example is repairs and assembly work. Unlike in Austria and Germany, these fall within the scope of services there, but not in Switzerland. The Swiss tax authority prohibits the application of the reverse charge mechanism in such cases.
In addition to fields that are generally excluded from the reverse charge mechanism, there are also special rules in Switzerland. These further restrict the use of the mechanism. Since 01.01.2018, companies whose place of supply for VAT purposes is Switzerland may not generate more than CHF 100,000 in taxable turnover worldwide. If they exceed this threshold, the reverse charge mechanism may no longer be applied and the foreign company must register with the Swiss tax authorities or in the Swiss VAT register in order to pay VAT there. Invoices are then issued with the “normal” VAT.
The only exceptions are:
- Companies that provide VAT-exempt services.
- Companies that supply energy to persons or companies registered with the tax authorities and entered in the VAT register.
Purpose of the reverse charge mechanism and the input tax on services
Both the reverse charge mechanism and the input tax on services are designed to prevent double taxation. The reverse charge mechanism was primarily created to establish a uniform system for VAT on imports and exports. It was also intended to reduce the bureaucratic burden on both companies and authorities. In addition, the reverse charge mechanism is intended to prevent tax fraud. The mechanism can prevent foreign service providers from charging VAT and then disappearing before paying it to the tax authorities.
The purpose of the input tax on services is similar to that of the reverse charge mechanism. This tax is intended to ensure a level playing field on the Swiss market. Under a pure reverse charge system, foreign providers who are not subject to Swiss VAT would issue net invoices (without VAT) to Swiss customers. Without the balancing effect of the input tax on services, such services would be significantly cheaper than those of domestic providers. The aim of the input tax on services is therefore to put services from abroad on an equal footing with competing Swiss services in terms of VAT and overall price.
Conclusion
Although Swiss VAT law is similar to that of the EU, it is not identical. Differences in the VAT system repeatedly lead to practical challenges. The rules have become clearer with the changes introduced in 2018, but numerous special regulations still mean that errors in relation to input tax on services and the reverse charge mechanism are easily made. Reliable tax advisors can make all the difference here and provide greater security when doing business abroad.