Legal certainty concerning import value in Switzerland reestablished – Assessment of 100 million swiftly overruled by the Federal Supreme Court

In understanding of the business impacts, the Federal Supreme Court clarified the uncertainty on determination of the import VAT value for foreign companies involved in supplies of goods to Switzerland resulting from the recent decision of the Federal Administrative Court.
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Background

A., a purchasing company of C. group established outside of Switzerland, however registered for Swiss VAT purposes, was acquiring goods from foreign third party suppliers. The goods were shipped to a Swiss warehouse of A. from where those were subsequently sold to C. (a Swiss established and VAT registered distribution company of the C. group), or other third party customers.

For customs clearance, the import value of the goods declared by A. was based on the price invoiced by the foreign suppliers to A. (i.e. on the purchase price). Further to their investigation, the Swiss Federal Customs Authorities (“SFCA”) claimed that A. underestimated the import VAT base, which should have been the sales price to C. minus 10%.
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In the first instance, the Federal Administrative Court (“FAC”) also denied determination of the import VAT value of the goods based on the price paid by the (foreign) importer to its foreign suppliers and supported the post-assessment of the SFCA of 100 mio CHF import VAT and almost 1 mio late interests. The position of the Court was held on slightly different grounds than the one of SFCA. The FAC ruled that (i) the transaction with foreign suppliers occurred already abroad as the importer had the power to dispose of the goods abroad since he was in charge of the transport of goods to Switzerland and therefore the purchase price paid by A. should not have been determinant for the import value, and (ii) it should have then been the market value, which however in the view of FAC corresponded to the value paid by the final Swiss customer to third party suppliers minus 10%. Thus in practice, FAC actually accepted for the case at hand that the value should have been the sales price to C. minus 10%, which was the original position of SFCA.

Decision of the Federal Supreme Court

The Federal Supreme Court (“FSC”) overruled in its decision 2C_1079/2016 issued on 7. March 2017, the decision of the FAC. In this surprisingly short period after the first instance decision, FSC held that the transaction relevant for the determination of the import VAT value is the transaction which led to the import, i.e. the price paid by A. to its foreign suppliers and clearly not the market value related to the subsequent transaction with C, as at the moment of the import the contract with the final customer was not yet in place.

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The FSC ruled that the fact who is the person in charge of the transport (i.e. supplier v. importer) has no impact on identifying the transaction relevant to determine the import VAT value of goods. Indeed, the FSC considered that the import value should be based on the agreement which gave rise to the transaction leading to import and that the transport is only a modality of the execution of the agreement.

The Court also considered that the characteristic feature of the purchase was the acquisition of goods abroad intended for sale in Switzerland and therefore the final destination was already known at the time of purchase from A to their suppliers. Consequently, based on article 54, al.1, let. a of the Swiss VAT law which provides that import value is the consideration where goods are imported under sales or commission agreement (and not the market value), the Court ruled that such consideration is the purchase price paid by A. to its foreign suppliers.

This decision removes the uncertainty resulting from the previous position of Customs Authorities in this case and following decision of the FAC, and confirms our standpoint on this subject matter. Fortunately, the Federal Supreme Court brought back the clarity into operations of many businesses, which is not only in line with the Swiss VAT law but also with the international standards. The FSC decision removes a certain inequality between foreign and Swiss based importers and gives necessary comfort to (foreign) companies involved in similar supply chain scenarios for the purpose of their customs reporting obligations. Companies importing goods in Switzerland for further sale via their local stock should ensure that their reporting is in line with this final decision of the FSC. The federal customs, as well as tax authorities will now need to review their practice and amend written guidelines in order to align with the legal grounds.

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Please contact our team for more details:
Patricia More, Partner, Indirect Tax, PwC Geneva
patricia.more@ch.pwc.com / +41 58 792 95 07

Christina Haas Bruni, Senior Manager Customs & VAT, PwC Basel
christina.haas.bruni@ch.pwc.com / +41 58 792 51 24

Kristyna Kaniova, Manager, Indirect Tax, PwC Geneva
kristyna.kaniova@ch.pwc.com / +41 58 792 92 34

Hans-Frederic Andersen, Senior Consultant, Indirect Tax, PwC Geneva
andersen.hans-frederic@ch.pwc.com / +41 58 792 91 97

Fixed establishment: Welmory – A never ending story

The Supreme Administrative Court in Poland ruled yesterday on the Welmory case. Even though the case went through Court of Justice of the European Union (CJEU, C-605/12) back to the final instance in Poland – nothing seems certain whatsoever. Many would have expected the court following CJEU argumentation and probably confirming existence of fixed establishment in Poland. This, however, turned out not to be the case.

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Based on oral announcement of the court, both District Administrative Court’s judgement (previous instance) and tax authorities’ decision have been repealed. According to the Supreme Administrative Court the tax authorities must supplement the decision by factual evidences as to whether the technical infrastructure in Poland is actually allowing to claim creation of fixed establishment (FE). The dossier of the case does not include evidences proving existence of FE in Poland, as it seems the tax authorities did not bring forward sufficient investigation in this area. Therefore, in order to preserve the two-instance separation rule, the Supreme Administrative Court cannot judge upon it. In turn, the court decided to return the case back to tax authorities for further investigation.

Such outcome means for Welmory that the proceedings are not over yet. It raises a question of taxpayer’s rights in light of extensive timing of proceedings. As the original decision reaches as far as 2011 and the ultimate conclusion still being remote, one can question the quality of protection of taxpayer’s right to certainty of law.

Even though at first glance it may feel disappointing that the verdict was not rendered as per the principles of when a fixed establishment is being created, but focused on procedural deficiencies – it actually brings new perspective into the whole area. The aspect of evidences and proving existence of sufficient infrastructure.

In light of the developments in Poland it may be sensible to anticipate any potential fixed establishment discussions, by for instance preparing so-called defense file. Comprehensive documentation outlining factually the existing setup, aligned with global tax policy and drafted outside of hectic tax audit, can prove helpful. Especially as yesterday’s Welmory judgement brings more emphasis on the need for tax authorities to actually prove sufficient levels of infrastructure to claim existence of a fixed establishment. Such exercise may be particularly valid in industries being more and more part of the Digital Economy, where the brick and mortar physical aspects are taken over by the importance of significant digital presence, remote management and IT infrastructure.

We are looking forward to deeper analysis of our colleagues from PwC Poland, together with whom we are closely monitoring the developments in Poland.

We will keep you updated on the subject matter.

In the meantime, you can contact us for more details and download the PDF here:
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Patricia More, Partner, Indirect Tax, PwC Geneva
patricia.more@ch.pwc.com / +41 58 792 95 07

Bozena Turek, Manager, Indirect Tax, PwC Geneva
bozena.turek@ch.pwc.com /+41 79 742 54 81

Assessment of 100 million due to incorrect import value confirmed by the Swiss court

Companies involved in supplies of goods to Switzerland should check their Swiss customs reporting further to a recent case of the Federal Administrative Court on determination of the import VAT value.

Swiss Federal Court VAT Decision - March 2017

Background

A., a purchasing company of C. group established outside of Switzerland, however registered for Swiss VAT, was acquiring goods from foreign third party suppliers. The goods were shipped to a Swiss warehouse of A from where those were subsequently sold to C. (a Swiss established and VAT registereddistribution company of the C. group), or other third party customers.

Swiss Federal Court VAT Decision - March 2017

For customs clearance, the import value of the goods declared by A. was based on the price invoiced by the foreign suppliers to A. (i.e. on the purchase price). Further to their investigation, the Swiss Federal Customs Authorities (“SFCA”) claimed that A. underestimated the import VAT base, which should have been the sales price to C. minus 10%.

Position of the Federal Administrative Court

The Court held in its decision A-2675/2016 dated 25 October 2016, that the purchase price paid to the foreign suppliers by A. was not relevant to determine the import VAT value. This was due to the fact that the transport from abroad was partially supported by A., which means the latter already abroad had the power to dispose of the goods and therefore the transaction with the foreign suppliers should no longer be relevant to determine the import VAT value. The Court also held that the import value could not be the value of the sale from A. to C. since the transactions were occurring after the import, and storing the goods in the Swiss warehouse of A. The Court then, however concluded that the import value should be the market value that C. would pay.

According to article 54, al.1, let. g of the Swiss VAT law, the market value is the price to be paid to an independent supplier in the country of origin. A. was therefore convinced that the imported value declared was in line with the Swiss VAT law. However, the Court held that the price to be considered is not the one that A. paid to the supplier in the country of origin of the goods, but the price that C. would have paid to third-party suppliers in this country for similar goods. On this ground, and to the extent that the Court considered that it could not be determined which price would be paid by C. in the country of origin, it held that the SFCA were entitled to consider that indeed such price would be the price paid by C. to A. minus 10%, according to deductive method developed in the Swiss Federal Tax Authorities’ guidelines which however do not have binding character. Thus, the initial position of the SFCA was confirmed by the court even though based on different arguments.

This decision resulted in an adjustment of more than CHF 100 million and late payment interest of CHF 924,854 for A.

Swiss Federal Court VAT Decision - March 2017

Outcome

We are of the opinion that neither the position of the Court nor the deductive method developed by the Swiss Federal Tax Authorities in their guidelines are in line with the Swiss VAT law or with the Customs administrative guidelines which only refer to the price paid by the importer in such case.

It could also be inferred from the reasoning of the Court that the deductive method would not be applicable in case exclusively the foreign suppliers would be handling the transport of the goods up until the Swiss warehouse of the recipient.

As the company was fully entitled to deduct input VAT, and due to the fact that customs duties in Switzerland are calculated based on weight of the imported goods, the valuation of the VAT import value had no impact on A’s liability as such. The main impact of the decision is however the late payment interests arising from the adjustment performed by the SFCA which has been confirmed by the Court and do amount to a substansive cost for A.

An appeal has been lodged against the decision, and as the position held by the Federal Administrative Court could be considered as not in line with the Swiss VAT law, we can only hope that the Federal Supreme Court will not confirm this controversial judgement of the Federal Administrative Court.

Recommended action

Companies importing goods from abroad to their Swiss warehouses, from where subsequent sales to Swiss customers are carried out should review their practice in order to assess the potential risk and monitor further developments. Provided that the Federal Supreme Court confirms the position of the SFCA, such businesses would notably be impacted if they are involved in the transport of the goods.

Download the PDF by clicking the image below:

Swiss Federal Court VAT Decision - March 2017

Please contact our team for more details:

Patricia More
Partner, Indirect Tax, PwC Geneva
patricia.more@ch.pwc.com
+41 58 792 95 07

Kristyna Kaniova
Manager, Indirect Tax, PwC Geneva
kristyna.kaniova@ch.pwc.com
+41 58 792 92 34

Hans-Frederic Andersen
Senior Consultant, Indirect Tax, PwC Geneva
andersen.hans-frederic@ch.pwc.com
+41 58 792 91 97