Direct representation under Art. 20(2) MWSTG - An analysis of recent case law

1. Introduction

Since the introduction of Art. 20 of the VAT Act on the allocation of services under VAT law on 1 January 2010, the Federal Supreme Court has only twice dealt in depth with questions concerning the allocation of services. Previously, there had been countless legal disputes on this issue.01 At first sight, the terms seem to be clarified. Whether this is really the case on closer inspection is questionable. More and more business models are based on electronic trading platforms, on big data and on price differentiation. The typical proxy model, where an agent acts in the name and for the account of a third party, is not readily apparent in electronic trading platforms. In particular, it is often not clear whether the trading platform is trading in its own name and/or in the name of a third party.

The following essay examines the question of what are the decisive criteria for the allocation of services. To this end, the two Federal Supreme Court rulings issued since 1 January 2010 are analysed.

2. Legal Basis

Art. 20 of the VAT Act entitled "Allocation of Services", in the version applicable since 1 January 2010, reads as follows:

Para. 1] A service shall be deemed to be rendered by the person who acts externally as the service provider.

Par. 2] Where a person acts in the name and on behalf of another person, the service shall be deemed to be performed by the represented person if the representative:
a. can prove that he is acting as a proxy and can clearly identify the represented person; and
b. expressly informs the beneficiary of the existence of a proxy relationship or if this is apparent from the circumstances.

Paragraph 3] Where paragraph 1 applies to a third party relationship, the relationship between the person appearing from outside and the person providing the actual service shall be qualified in the same way as the relationship between the person appearing from outside and the person receiving the service.

Under the aMWSTG, which applied from 1 January 2001 to 31 December 2009, VAT representation was regulated as follows in Art. 11 "Supplies and services in the case of representation":

Paragraph 1] Any person who expressly supplies goods or services in the name and for the account of the represented person, so that the transaction is concluded directly between the represented person and third parties, shall be considered merely as an intermediary.

Paragraph 2] If the representative is acting on behalf of a third party in the case of a supply of goods or services, but does not expressly act on behalf of the represented party, there is a supply of goods or services both between the represented party and the representative and between the representative and the third party.

Para. 3] In commission business, a delivery exists between the principal and the commission agent and between the commission agent and the third party. In the case of sales commission, the commission agent is considered the principal, in the case of purchasing commission, the commission agent is considered the supplier.

Par. 4] In the case of the supply of items within the framework of auctions in the art and antiques trade, proof of mere brokerage shall be deemed to have been furnished if the Auctioneer:
a. receives a written order to sell the items in question in the name and for the account of a third party before the auction begins; and
b. notifies the prospective buyers in writing that he is offering the items in question in the name and for the account of a third party.

One reason for the complete revision of this provision was that under the aMWSTG the requirements for VAT representation were stricter than those under Art. 32 para. 2 CO under civil law.02 According to this provision, a so-called direct representation also exists if the third party had to conclude from the circumstances that the representative was acting on behalf of the principal or if he is indifferent to whom he concludes the contract.

Under Art. 11 aMWSTG, the representative had to act expressly on behalf of the represented person. In its guidelines, the FTA required that a written order based on mere mediation must be available. Documents such as contracts, invoices and receipts were required which clearly showed that the representative was acting expressly in the name and on behalf of the represented person. In addition, a written account of the proceeds and commission had to be available.03

The very narrow concept of VAT law representation and the formalistically handled representation regulation by the FTA led to numerous legal disputes.04 For this reason, the "Spori Report" in 2006 already called for clarification and improvement of the deputy regulation.05 The new regulation, which aimed to approximate the civil law regulation according to Art. 32 OR06 and thus makes it easier for the deputy to prove a direct representation relationship seems to be better accepted in practice. This is also reflected in the fact that the Federal Supreme Court only had to deal with Art. 20 MWSTG in its current form in very isolated cases.

The two relevant federal court decisions are presented below.

3. Case Law

3.1 Sale of second-hand clothes

The Second-Hand clothing case (2C_206/2015 of 16 November 2015) concerned the A GmbH, which had been entered in the register of persons liable for VAT since 1 July 2005. According to the entry in the commercial register, the company's purpose was to trade in second-hand clothing.

In various letters the A GmbH informed the FTA that until 2009 it had erroneously charged VAT on the turnover from the sale of second-hand clothes. It is correct that those transactions are not attributable to it, since it acts in the name and on behalf of the persons who have delivered the clothing. The turnover used to determine its tax liability consists exclusively of commissions which it invoices only after successful sales mediation. The annual total of these invoices is below the turnover limit of CHF 100,000, which is decisive for the tax liability, which is why it is requesting that they be deleted from the register of VAT payers.

The FTA carried out an inspection in 2012, which concluded with a tax claim for the 2010 tax period. The FTA explained that the A GmbH did not act in the name of a third party but in its own name when selling the Second-Hand clothes and therefore had to be qualified as service provider.

Before the Federal Administrative Court A GmbH asserted that the agency relationship was shown by the fact that the buyers did not receive any receipts or receipts from A GmbH when buying second-hand clothes. As a direct representative, it only settles accounts with the represented parties, i.e. the respective consignors. Consignors could be clearly identified by a customer number attached to each garment.

The Federal Administrative Court ruled in favour of the A GmbH. It considered that an external appearance of the consignors could also result from the circumstances. In contrast to the old law, it is no longer mandatory to expressly disclose the actions in the name of another person and thus the agency relationship with the recipient of services. Whether such circumstances exist has to be assessed from the point of view of an objective customer of a Second-Hand clothing store. The design of the Second-Hand clothing shop by using numbers attached to the clothes for the identification and allocation of the consignors is practically widespread and therefore also known by the buyers of Second-Hand clothes. It is true that the Second-Hand clothing trade is sometimes also operated as a commission business with indirect representation. In that case, however, there is no need to affix numbered labels to the clothes and there is no reason to accept direct representation. On the other hand, if the business is conducted by means of numbers, there are notoriously circumstances which, from a VAT point of view, indicate the existence of a direct agency relationship.

The FTA referred the ruling to the Federal Supreme Court, which upheld the appeal. The labels used in the shops of A GmbH to identify the goods sometimes showed the product designation, but above all various numbers. Only the price designation is clearly identifiable. How it should be possible for an objective third party without specialist knowledge and without access to the business documents of the A GmbH to conclude that a relationship of representation exists is quite simply incomprehensible. Nor can it be said that the existence of an agency relationship in the Second-Hand clothing trade is notorious.

3.2 Life advice over the telephone

The case of life advice over the telephone (2C_767/2018 of 8 May 2019) concerned A GmbH, a telecommunications company based in Germany. In accordance with the general terms and conditions, the latter offered its customers the use of service numbers for telephone services. The A GmbH was not entered in the register of persons subject to value added tax.

A GmbH maintained business relations with sole proprietor B, who provided telephone services in the area of life advice. The sole proprietor was entered in the register of persons liable for VAT by the FTA with retroactive effect from 1 January 2008. Ms B subsequently invoiced VAT for all work performed by her for A GmbH in the years 2008 to 2011. For its part, the A GmbH applied to the FTA for reimbursement of the VAT invoiced by the sole trader (pursuant to Art. 151 et seq. of the VAT Ordinance).

The FTA denied the requirements of the remuneration procedure because the A GmbH was not the recipient of the life advice service provided by the sole proprietor. Rather, the contractual relationship for this service was concluded directly between the telephone customer and the sole trader.

In its appeal to the Federal Administrative Court, A GmbH claimed that it was not a provider of telephone services under civil law. From the point of view of VAT, however, the service should be allocated to it because it bills its telephone customers for the service in its own name. Consequently, the rules on indirect representation would apply.

The Federal Administrative Court dismissed the appeal. Under the new law, the deputy no longer has to expressly inform the recipient of the service of the deputy relationship in every case. Such a situation could also arise from the circumstances. However, the reference on the A GmbH's invoice "services of other providers" clearly declares the telephone service to the outside world as the service of another provider. The footnote also indicates how the holders of the business numbers can be found out.07 The substitution relationship can thus be regarded as having been expressly notified to the recipient of the service. It is apparent to an objective third party, at least from the circumstances as a whole, that the life advice service is invoiced on behalf of Ms B. There was no invoicing in the name of A GmbH. The publicly accessible general terms and conditions of A GmbH would also support this conclusion.

The appeal lodged with the Federal Supreme Court was also unsuccessful. The highest court considered that for VAT purposes, representation presupposes that the (representative) person representing the customer does not act as a supplier of services to the outside world. Accordingly, Article 20(1) of the VAT Act expresses the principle according to which a benefit is attributed to the person who is the external provider of the benefit. A GmbH had only appeared to the outside world in its own name with a view to telecommunications transmission, but not for the life advice service. The court thus affirmed the existence of representation in the VAT sense for the years 2008 and 2009 (under the old law) and for the years 2010 and 2011 (under the new law).

The Federal Court's assessment did not cover the service which A GmbH provided to sole proprietor B for the operation of the service number and which was charged to her by partially withholding the tariff charged to the calling persons.

4. Case Law Assessment

4.1 Acting on behalf of third parties

4.1.1 General information

According to Art. 20 para. 1 MWSTG, a service is deemed to be provided by the person who acts externally as service provider. The Federal Supreme Court relied in particular on the dispatch, according to which direct representation could only exist if "the (deputy) representative person was not a service provider to the outside world"08 to appear.09

This statement must not be understood in such a way that the deputy may not appear to the outside world. Rather, it means that the deputy, if she wishes to act as a substitute, may not act in her own name against the outside world as a service provider. Otherwise, the deputy is qualified as a service provider according to Art. 20 Para. 1 MWSTG. Instead, the deputy must appear in business life in such a way that the beneficiaries also understand her as a deputy. The deputy must make a significant contribution within the framework of a concrete performance relationship.10

The crux of the matter is that the business world has become more complex. It is not always immediately clear whether the person acting against the outside world is acting a) in his own name, b) in someone else's name or c) in his own (not to be confused with "in his own name") and in someone else's name. The two cases described above, which were judged by the Federal Supreme Court, are examples of this complexity.

Prior to the revision of the law, it was clear that a person was only considered a direct representative for VAT purposes if he or she was expressly acting on behalf of the person represented. In the absence of this requirement, the person was to be registered for VAT purposes as a dealer. Under the new regime of Art. 20 (2) MWSTG, an agency relationship (i.e. acting in the name and for the account of a third party) can also arise from the circumstances, which makes it considerably more difficult to distinguish it from indirect representation and from the own-account trader.

4.1.2 Federal court rulings

In the case of the Second-Hand clothes shop the shop undoubtedly appeared with its own staff, in its own business premises, with its own name and with its own advertising to the outside world. Any customer could and could reasonably assume that the shop was providing a service and therefore basically acted as a dealer or indirect representative. It was disputed, however, whether the objective buyer had to assume from the circumstances that the clothing shop was acting on behalf of another person and was therefore not a service provider (own-account trader). The Federal Administrative Court considered that a customer of a Second-Hand clothing store must notoriously assume that he acted in the name and on behalf of the consignors and thus as an intermediary. The Federal Supreme Court just judged this differently and stated that an objective customer of a second-hand clothes shop without special knowledge and without access to the business documents of the second-hand clothes shop could not conclude the existence of an agency relationship solely on the basis of the labels attached to the clothes.

In the case of life advice over the telephone, the telecommunications company also appeared under its own name. However, the appearance of the telecommunications company under its own name against the outside did not have the consequence that a proxy relationship telquel had to be denied, otherwise the Federal Court would not have concluded that the telecommunications company acted as a proxy in casu. Rather, the case shows by way of example that a person can act situatively as a service provider in his own name or as a representative in someone else's name and that it can only be decided on the basis of consideration of all circumstances in which function he actually acts.

In the case of life advice over the telephone, the Federal Supreme Court skilfully avoided the question of how to conclude from the circumstances that the deputy relationship was a substitute. Instead, it correctly began the examination with Art. 20 Par. 1 MWSTG and concluded that the life adviser herself acted as a service provider vis-à-vis the telephone customer. Thus, the telecommunications company was no longer considered to be a service provider for life advice services to telephone customers. In a second step, the Federal Court examined whether the telecommunications company acted as a proxy for VAT purposes. It considered that the right of representation under value added tax law merely regulates the allocation of a service and is not subject to party disposition, as it is not a contractual assessment.11 In other words, the Federal Court clarified that the civil law regulation between the service provider and his deputy or between two service providers is irrelevant. Finally, the Federal Supreme Court affirmed the position of the telecommunications company as the direct representative because the company indicated in its invoices that it was "services of other providers" and thus clearly expressed its representation relationship. It was therefore not necessary to assess whether the substitution was 'due to circumstances'.

The question is whether the Federal Court would have reached the same result if the reference "services of other providers" had been missing in the invoices. The Federal Supreme Court should have interpreted the undefined legal term "from the circumstances" for this purpose, whereby it should have been made clear that the term only refers to the existence or non-existence of a representation relationship.

This interpretation can only be speculated about, as both Federal Court rulings lack clear criteria for delimitation. The administrative practice also seems rather random. For example, a direct substitution relationship is assumed "due to the circumstances" in the following situations:

• Sale of an event ticket through an advance booking office (e.g. concert, sports event);
• Sale of all types of lottery tickets through kiosks, restaurants and other points of sale;
• Sale of telephone cards (prepaid cards) through kiosks and other points of sale;
• Sale of motorway and bicycle vignettes through garages, bicycle shops and other points of sale;
• Sale of train tickets, multiple-fare cards, public transport season tickets and air tickets through travel agencies and other sales outlets.12

4.1.3 Interim conclusion

The uncertainty as to how the vague legal term "from the circumstances" is to be understood is not conducive to a mass tax such as VAT. The question of attribution should be simple and clear to answer. Therefore, in my view, the direct representative should at least have to indicate to the beneficiary that she is acting as such.13 According to federal court rulings, an indication by means of additional numbers on the price tag is not sufficient. However, according to the Federal Supreme Court, it should be sufficient to indicate on the invoice that the services in question are provided by a third party, although the name of the third party need not be mentioned.

4.2 Trading on behalf of third parties

4.2.1 General information

The agency relationship requires not only acting in the name of another person, but also acting on behalf of another person. As far as can be seen, case law in the field of VAT has never commented on the meaning of the expression "acting on behalf of another person". In my opinion, no greater importance should be attached to it either. It merely serves to indicate that a person is running another person's business.

The representative conducting another's business does not have to act exclusively in the interest of the person represented. The representative (e.g. a trustee) may also pursue his own (parallel) interests. The extent to which the deputy's own interests must coincide with the interests of the person represented is not regulated by Art. 32 OR. This provision governs the power of attorney and not the mandate. The power of attorney must be clearly separated from the mandate, as there are powers of attorney without mandate and orders without powers of attorney. The power of attorney is a unilateral legal transaction.14 It affects the external relationship, whereas the contract affects the internal relationship.

Art. 20 MWSTG is a standard which is intended to allocate the services relevant to value added tax. It is closely based on civil law representation in accordance with Art. 32 OR and not on a contractual relationship.15 The decisive criterion to which the service is to be assigned is always the type of external appearance, whereby the economic assessment is to be taken into account.16 Consequently, circumstances which are not recognisable from the point of view of the recipient of the service are not important.

For example, from the point of view of VAT law, it is basically irrelevant whether and which obligation transaction the representative has concluded with the represented party. Even an invalid substitution relationship does not lead to a re-qualification of the substitute with the consequence that the substitute would have to be regarded as a service provider. As long as the representative performs a service on behalf of another person and can prove that he (a) acts as a substitute, (b) can clearly identify the represented person, and (c) expressly discloses the existence of an agency relationship to the recipient of the service or that this is apparent from the circumstances, the service is to be attributed to the represented person and not to the substitute.

4.2.2 Application example and interim conclusion

The following example will illustrate this:

A Ltd., based in the USA, operates a booking platform through which event tickets can be booked in Switzerland. The booking platform pretends to be the representative of the event organisers and writes in its general terms and conditions that the sales contract between the buyers and the event organisers is concluded. The entire purchase procedure (order, payment, delivery) is carried out via the booking platform. In the relationship between the event organisers and A Ltd. it is agreed that the event organisers would have to pay a commission of 10% of the ticket price of the booking platform determined by the event organisers. It is also agreed that the booking platform can determine the price of the tickets itself, which it does with the help of Big Data. In addition to the commission of 10%, the difference between the price set by the event organisers and the price actually paid is due to the booking platform.

The example shows that there is no doubt that direct representation exists, even if it cannot be denied that the operator of the booking platform is pursuing its own interest (like a reseller). However, this does not change the qualification as a direct representative, because the direct representative always pursues an own interest, otherwise she will have no economic interest to act as a direct representative.

Incidentally, this also applies if the direct representative does not disclose her profit margin to the represented party and only passes on the minimum sales amount, provided that she identifies herself to the outside world as the direct representative.17 The provision of Art. 20 MWSTG aims at the allocation of benefits and does not ask how the parties divide any profit margin.

4.3 Authoritative view

According to case law, whether a direct agency relationship exists under VAT law is assessed from the perspective of the service recipient. It is not the point of view of the concrete service recipient that is decisive, but it must have been discernible from the objectified perception of a third party that the representative did not want to commit himself but a third party. The fact that from the point of view of the recipient of the service it is necessary to assess who is the supplier to him is in line with the concept of VAT. The aim of this is to tax non-commercial domestic consumption (consumption), provided that it involves the use of private income and assets. Thus, it is primarily from the perspective of the service recipient that it must be assessed whether a service relationship exists. Consequently, it is only logical to assess from the same visual point of view the relationship between the parties. Thus, in both of the above cases, the Federal Administrative Court and the Federal Supreme Court correctly failed to consider the contractual relationship between the represented persons and the representatives. On the contrary, in the case of life advice over the telephone, the Federal Administrative Court even used the publicly accessible general terms and conditions of the telecommunications company and concluded that in the relationship between the telecommunications company and the service recipient, the former was to be regarded as the representative of the life advice provider.

It follows from this that the civil law or contract law structure between the represented party and the representative, which the service recipient is unlikely to be aware of as a rule, must not be decisive in determining whether an agency relationship exists.18 Thus, the Federal Court held that it was irrelevant whether the telecommunications company lacked the will to act as direct representative.19 Similarly, the Federal Administrative Court did not accept the argument that the service provider invoiced the telecommunications company and that the telecommunications company therefore had to be regarded as the indirect representative.20 From this it can be concluded that the internal relationship between the represented person and the representative is basically irrelevant, because the external appearance is decisive.21 In another decision, the Federal Administrative Court considered that the starting point for the examination of the objective appearance is regularly the internet presence.22

For example, if the owners of holiday homes agree with the operators of an Internet platform that the Internet platform should advertise the holiday homes for rent in its own name and for its own account, it may still be possible for the operators of the Internet platform to be considered as direct substitutes. This would be the case, for example, if the objective beneficiary (Internet user) were to receive an invoice referring to the services provided by the owners of the holiday homes. To avoid such a divergence of views, the operators of the Internet platform must communicate clearly to the Internet user whether they are acting as representatives or on their own behalf.

4.4 Single or double benefits?

In both of the above cases, one central issue was not addressed in detail, namely whether the beneficiary receives one or more benefits. In the case of the Second-Hand clothing shop the courts only dealt with the delivery of Second-Hand clothes and the question who is the supplier of this delivery. This gives the impression that, in the case of direct representation, there can only be a performance relationship with the beneficiary. However, this conclusion must not be drawn.

In the case of life advice, the Federal Administrative Court and the Federal Supreme Court distinguished between two different services: life advice and telecommunication services. The Federal Administrative Court considered that the telecommunications company should act externally as a service provider in its own name with regard to the telecommunications service. That does not apply, however, to life advisory services.23 The Federal Supreme Court concluded from this that on the one hand a life consulting service of the sole proprietor to the customer and on the other hand a technical telecommunication service of the telecommunication company to the customer was present. Only with regard to the invoicing of the services provided by the sole trader did the telecommunications company act as a direct representative.24

This conclusion is convincing: The allocation of services is about the allocation of supplies and services and not about the question to whom the remuneration is paid. Consequently, a clear distinction must be made between services and remuneration. The collection transaction is an order to the collection agency to collect a claim in the name and for the account of the creditor. As the collection business relates only to the fee, the collection agency does not become the representative of the original service provider with regard to the service for which the fee is demanded.25 The debt collector is only a representative of the company regarding the collection action.

4.5 Relationship between the represented person and the representative

As already explained above, the internal relationship between the person represented and the direct or indirect (deputy) representative is in principle irrelevant for the assessment of whether there is a direct or indirect representation, especially since the content of this relationship is usually hidden from the service recipient. This view is likely to be shared by the highest courts, inasmuch as the Federal Supreme Court states that VAT representation is a concept of allocation which is based on the civil law representation under Article 32 et seq. OR leaned against. In other words, the only decisive factor is who appears to the beneficiary.

One consequence of this is that a direct representative who does not disclose her profit margin in relation to the represented party and thus acts like a reseller in relation to the represented party cannot be qualified as a service provider in relation to the service recipient for this reason alone.26 In order for the person represented to be able to correctly account for VAT to the tax authorities, he must ensure in the contract with his deputy that the latter discloses his profit margin. In the absence of such an agreement or if it is de facto impossible to enforce it, the represented person runs the risk of being assessed according to his or her dutiful discretion (Art. 79 MWSTG).