Value added tax in the annual financial statements - general information for practical application realization
The MWSTG includes standards for the clean recording of VAT in the annual financial statements, which must be observed. This article deals with the relevant standards of accounting law and refers to the current decision of the Federal Administrative Court on value added tax. The correct recording of turnover tax and input tax and the guarantee of the audit trail are important prerequisites for VAT compliance.
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Some time ago, the Swiss Code of Obligations introduced the new accounting law (Part 32 Commercial Bookkeeping and Accounting), which defines new standards for accounting. The new accounting law is independent of the legal form. However, accounting regulations are not only to be found in accounting law. The VAT Act and the VAT information sheet also contain regulations that are important for accounting. This article highlights general questions and in some places deals with the current decision of the Federal Administrative Court.
Legal foundations of accounting law with relevance for the value added tax
According to Art. 957 para. 1 OR, sole proprietorships and partnerships must follow the bookkeeping and accounting rules, provided they achieved a turnover of at least CHF 500000 in the last financial year. Legal entities are obliged, irrespective of their annual turnover, to implement bookkeeping and accounting in accordance with the OR.
Accounting requires that all business transactions and facts which are necessary for the asset, financial and earnings situation be recorded. According to Art. 957a Para. 2 of the Swiss Code of Obligations, accounting principles include complete, systematic and truthful recording of business transactions, proof of the accounting process, clarity, expediency and verifiability. Furthermore, the principle of accounting is important according to Art. 958c para. 1 OR, which stipulates that the financial statements must be complete, clear and understandable.
The accounting law now prescribes a minimum classification in accordance with Art. 959a (1) and (2) of the Swiss Code of Obligations. Among other things, the items "other current receivables" and "other current liabilities" must be listed. In addition, the notes to the financial statements must contain information on the principles applied, insofar as these are not directly prescribed by law.
Accounting requirements under VAT law
The MWSTG has few legal bases which concern accounting. According to Art. 70 MWSTG, the taxable person must keep his business books and records in accordance with the principles of commercial law. The FTA may, by way of exception, impose additional recording obligations if this is indispensable for the proper collection of VAT. In addition, the business documents required in connection with the calculation of the deposit tax and the own consumption of immovable property must be kept for 20 years.
In this context, the test lane is a central element (MWST-Info 16, p. 8, 2010). This means tracking business transactions from the individual document to the accounting and VAT statement, or in reverse order. An audit trail requires systematic recording of business transactions, documents with clear account assignment and orderly storage of the accounts.
In accounting, value added tax usually represents a lead item. VAT must be recorded on the taxable income and input tax can be claimed against the FTA on the expenses and investments. It is therefore advisable to keep accounts for sales tax and input tax on material and service expenses and for input tax on investments and other operating expenses (MWST-Info 16, p.10, 2010). A distinction can also be made between agreed and received remuneration for the settlement type.
Then, according to Art. 72 para. 1 VAT Act, the taxable person must report deficiencies in his tax statements to the FTA when preparing his annual financial statements. In addition to the annual financial statements, the taxable person must also prepare a reconciliation of turnover in accordance with Art. 128, para. 2 VAT Ordinance. This must show that the declared turnover and input tax corresponds to the income and expenses in the income statement.
An essential element under the VAT Act for taxable enterprises is therefore that business transactions are correctly booked and processed, in particular to ensure the audit trail. Moreover, poorly kept accounts can be to the detriment of the taxable person and are an important basis for establishing the correct entitlement to input VAT.
Implementation of the provisions on value added tax in the annual financial statements based on the Federal Administrative Court ruling of 27 July 2016 (A-1129/2016)
The correct presentation of the value added tax is an important prerequisite for the annual accounts to be prepared in accordance with Art. 957 et seq. of the Swiss Code of Obligations. OR is complete, truthful and clearly formulated.
The central prerequisite for this is the appropriate management of the turnover and input tax accounts. They should be further differentiated as required and as the complexity of the company increases and should be listed accordingly in the chart of accounts. It is also essential that the account assignment of trade payables is appropriately assigned and systematically organised. This forms the important basis for proving the claim for input tax against the FTA. Furthermore, the circumstances of changes in use and own consumption must be precisely analysed and determined. Trade receivables must also be calculated and presented at the applicable tax rate. The value added tax is to be recorded and accounted for accordingly.
In its judgment of 27 July 2016 (A-1129/2016, E. 2.2.1), the Federal Administrative Court states that the taxpayer is bound by his or her statement of account if he or she does not make a reservation with regard to tax liability, tax amount, deductions, etc. The Federal Administrative Court (Bundesverwaltungsgericht) states that the taxable person is bound by his or her statement of account. It can therefore no longer return to billing or self-assessment - except in the cases provided for by law (see also BGer, 16 February 2012, 2C_650/2011, E. 2.5.3; 2 June 2003, 2A.320/2002, E. 220.127.116.11 = ASA 74 p. 672; BVGer, 19 July 2012, A-5105/2011, E. 2.4.4; 21 February 2011, A-7712/2009, E. 3.2.1). According to the self-assessment principle, the taxable person is solely responsible for the complete, correct and timely declaration of his taxable transactions and deductible input taxes. It is fundamentally bound to its accounting or self-assessment. The Federal Administrative Court also states that the taxpayer bears sole responsibility for setting up his books of account in such a way that they can be used easily and reliably to determine the relevant facts for determining tax liability and for calculating deductible value added tax. If the taxable person has violated his accounting obligations in this sense, he cannot blame the resulting disadvantages on the FTA.
From the Federal Administrative Court's remarks, the conclusion for the annual financial statements can be drawn that the accounts must be set up appropriately, appropriate accounting processes must be defined for the posting of trade receivables and payables and appropriate internal controls must be implemented in these processes. In addition, a regular audit of the claim for input tax must be carried out and a VAT reconciliation in accordance with Art. 127 of the VAT Ordinance must be provided as proof for the annual financial statements.
The VAT and input tax accounts can be subsumed under the above-mentioned balance sheet accounts according to the minimum classification or can be shown separately in the balance sheet. The question remains open as to whether declarations and statements in the appendix concerning the obligation to pay VAT pursuant to Art. 959c para. 1 no. 1 CO are to be executed. The disclosure concerns the application of bookkeeping and accounting (accounting in accordance with the Swiss Code of Obligations, VEB Praxiskommentar, p. 408, 2014, SKV Verlag). This may include the application of VAT. As VAT is a significant issue for many businesses, annex information may be appropriate. If there are material differences to the annual financial statements, the recognition of a short-term provision must be examined.
In its decision of 27 July 2016 (A-1129/2016), the Federal Administrative Court confirmed the applicable VAT Act and clarified that the correct, complete and clear recording of VAT in the annual financial statements is an important prerequisite for ensuring that turnover and input tax is implemented in accordance with the law and that this is the responsibility of the taxable person. In particular, the entitlement to input tax must be guaranteed and proven by consistent application of the accounting system. In this respect, the management body of a taxable business should, in its annual accounts, have a picture of how VAT is reflected in the accounts.