Subsequent amendment of VAT liability and deduction - A critical assessment of administrative practice

1. Introduction

The company subject to VAT provides a service, issues an invoice (including VAT) and pays the VAT due to the FTA. The debtor has delayed payment, which is why the company wonders whether it can claim a corresponding reduction in remuneration. This paper examines these and other questions relating to reductions in remuneration. A distinction is made below between the situation without assignment of receivables and the situation in which an assignment of receivables took place.

2. remuneration and corrections to remuneration without assignment of claims

2.1 General points

"Remuneration" in the sense of value added tax law is defined as an asset which the recipient or a third party in his place spends to receive a service.01 With the exception of import tax, the payment of remuneration is an indispensable element of the existence of a taxable supply.02 If the recipient or the third party does not spend anything on the receipt of a benefit, there is also no taxable benefit. This is because VAT is not based on whether someone receives or consumes something, but - primarily for practical reasons - is linked to the financial expenditure (private income and wealth) for consumption.03

However, the fee is not only a constituent element of the facts for the existence of a taxable turnover, but also the basis of assessment for VAT. Domestic tax is calculated on the basis of the remuneration actually received.04 In the case of invoicing according to the fee received, VAT can only be charged if the fee is also received. If this is lower than originally invoiced, no correction of the fee or VAT is necessary, because the fee or VAT has not yet been invoiced. The situation is different if settlement is based on agreed remuneration (so-called debit taxation) and the tax period in which the invoice was issued and posted is not identical to that in which the remuneration was received and the received remuneration does not correspond to the posted remuneration. In this case a correction is imperative.05 If the remuneration received is lower than that recorded, the tax authorities may have been overpaid. If the remuneration received is higher than that recorded, the tax authorities may not have been paid enough VAT.

Article 41 of the VAT Act deals with this issue and, under the title "Subsequent amendment of the turnover tax liability and the deduction of input tax", provides as follows:

Paragraph 1] Where the consideration paid by or agreed with the recipient is corrected, an adjustment to the VAT liability shall be made at the time when the correction is entered in the accounts or when the corrected consideration is received.
Paragraph 2] Where the taxable person corrects the charge made by the taxable person, an adjustment of the deduction shall be made at the time when the correction is entered in the accounts or when the corrected charge is paid.

This provision expresses in particular that the correction is not retroactive but ex nunc. If a service provider has booked an invoice in the amount of CHF 107.70 (incl. 7.7% VAT) in the first quarter of 2019 and the invoice is only paid in the second quarter of 2019 after deduction of a 3% discount, the VAT (CHF 0.23) charged and paid in excess will not be corrected retroactively for the first quarter of 2019 but in the second quarter of 2019. The reduction in fee must be entered in field 235 on the VAT invoice. If the service provider is not allowed to demand interest on the liquidity disadvantage it experiences because the fee is not paid in time for the service to be provided, then there is no interest on the VAT paid too much to the tax authorities.

The corrective provision of Art 41 MWSTG applies in a mirror image and logically on the side of the recipient of services. If the latter has booked an invoice in the amount of CHF 107.70 (incl. 7.7% VAT) in the first quarter of 2019 and the invoice is only paid in the second quarter of 2019 after deduction of a 3% discount, the excess input tax (CHF 0.23) will not be corrected retroactively for the first quarter of 2019 but in the second quarter of 2019. The corresponding correction must be made in field 415 on the VAT statement. No interest is paid on the excess input tax deducted or reclaimed.

The reason for claiming a reduction in remuneration is irrelevant in terms of VAT law: Reductions in remuneration may be the result of mutual agreements. These include in particular rebates, discounts, annual bonuses, volume discounts or loyalty bonuses.06 However, reductions in remuneration can also occur against the will of the service provider, for example in the case of debtor losses (reductions in remuneration in the event of insolvency or bankruptcy of the debtor) or if the debtor notifies defects and asserts a price reduction on the basis of warranty claims. In this context, the question arises at what point in time the reductions in remuneration are to be taken into account in the VAT statements.

2.2 Assertion of the reduction in remuneration

From the point of view of the service provider, there is an interest in claiming the reduction in remuneration as early as possible in the VAT settlements, because it reduces its net tax burden. From the perspective of the beneficiary, the interest is reversed. He would like to claim the input tax adjustment as late as possible because it increases his net tax burden. As a consequence, the view of the line receiver is no longer discussed.

The FTA's practical instructions do not address the question of how and when the reduction in remuneration and thus the reduction in the tax claim is to be applied. In the literature, it is considered that the reduction in fee should be applied when the service provider has written off the receivable in his books.07 There is no need for further conditions. In particular, the service provider does not have to present, for example, loss certificates in order to write off a claim and claim a reduction in remuneration. This opinion deserves approval, since the basis of assessment for VAT is the remuneration actually received.08 If the service provider considers the claim to be wholly or partly irrecoverable and makes a corresponding write-off, the basis of assessment changes, which is why a reduction in remuneration should be possible without further conditions.

When a receivable may be considered wholly or partially uncollectible and therefore needs to be written off is answered by the principle of prudence under commercial law.09 This requires that in the event of uncertainties, especially in connection with the valuation of assets and the formation of provisions, the less optimistic and thus more cautious variant is chosen.10 In many cases, the value adjustments of receivables (del credere for bad debt losses) are set at a flat rate. These flat-rate value adjustments are regularly recognised by the administrative practice regarding the claiming of reductions in value added tax.11

It should be noted that the right of correction (Art. 41(1) VAT Act) applies regardless of whether and, if so, when an input tax correction obligation (Art. 41(2) VAT Act) arises. The service provider is also not obliged to inform the service recipient that it qualifies its claim as irrecoverable.12

3. remuneration and corrections of remuneration after assignment of claims

3.1 Assignments of receivables

In practice, completely different standards should apply to reductions in remuneration following the assignment of claims. Some background information is required before this practice is discussed. In particular, assignments of claims may be made for the purpose of collection or sale.

3.1.1 Assignments of receivables for collection purposes

In the debt collection business, a creditor commissions a collection company to collect one or more receivables and pays the collection company a fee for the collection. The collection service includes clarifying and assessing the debtor's solvency, the dunning process, the actual collection and the forwarding of the collected amount to the creditor. The collection fee is usually a low percentage of the debtor's payment, depending on the type of claim and the class of debtors (natural/legal persons, foreign/domestic persons). The collection company does not assume a risk for the loss of receivables due to creditworthiness.

In the collection business, the collection company does not usually buy the claim from the creditor (ceding party). Nor does it assume a del credere risk, but merely acts on behalf of the creditor by collecting his claim against the debtor.

The collection agency can collect the claim (including any VAT) in the name and for the account of the creditor. Accordingly, the creditor's claim need not be assigned to the collection agency.

However, the collection agency can also act in its own name, but for the account of the creditor. So that in this case the collection agency can enforce the claim against the debtor in its own name, the assignment (cession) of the creditor's claim to the collection agency is required. The assignment makes the collection company the unrestricted owner of the right and creditor of the claim. However, in this case as well, the collection agency - unless otherwise stipulated in the contract - must forward the collected amount to the original creditor on the basis of Art. 400 CO.

3.1.2 Assignments of receivables for the purpose of sale (sale of receivables)

In the event of a sale of receivables, the buyer of receivables assumes the full risk of a default of receivables due to creditworthiness (so-called del credere risk); i.e. if the purchased receivables are not paid or are only partially paid, the buyer of receivables has no right to assert any claims against the seller of receivables and cedant.13 Conversely, the buyer of a claim does not settle with the original creditor after a possible payment of a claim. Consequently, the original creditor usually does not know whether, to what extent and when a debtor has paid his claim.  

The purchase of claims requires a contract under the law of obligations (pactum de cedendo). This is concluded as a single transaction between the seller of the receivables and previous creditors (assignor) on the one hand and the buyer of the receivables and new creditor (assignee) on the other. The debtor (debitor cessus) is not a party to this contract, nor is the validity of the assignment dependent on his notification. In order to fulfil the sale of receivables (disposal transaction), the assignment of the receivable is required. This is done by assignment in accordance with Art. 164 et seq. of the Swiss Code of Obligations. It must be in writing (Art. 165 Para. 1 CO).

The legal consequence of the purchase of receivables is that a new creditor takes the place of the previous one.14 The claim is transferred from the seller of the claim to the buyer of the claim. Similarly, any claims for non-performance or improper performance or for default are also transferred to the extent that they do not concern the fate of the underlying transaction per se but only the assigned receivable itself. Thus, the right to charge interest on arrears and any collection fees is transferred to the purchaser of the claim together with the main claim.

In accounting terms, the original creditor and seller of the receivable must derecognise the receivable from the underlying transaction. In return, he acquires a new purchase price claim against the purchaser of the claim. Derecognition is effected by writing off the receivable from the underlying transaction in the amount of the difference between the original receivable and the new purchase price receivable from the buyer of the receivable.15 For its part, the seller of the receivables records the acquired receivable as an asset and the new purchase price claim of the seller of the receivables as a liability under liabilities.

3.2 Reduction of charges after assignment of claims for collection purposes

In its administrative instructions, the FTA does not comment on the question of how bad debts are to be treated under VAT law following the assignment of receivables for collection. Since this does not seem to be worth regulating, it can be assumed that the principle set out in point 2.2 above, according to which a reduction in remuneration may be claimed at the time when the service provider has written off the claim in his books, applies.

3.3 Reductions in remuneration after assignment of receivables for sales purposes

3.3.1 Administrative practice

In accordance with administrative practice, bad debts in transactions involving monetary claims are assumed by the third party (buyer of the claim) and not charged to the service provider, which is why they cannot be claimed by the service provider as reductions in remuneration. However, a subsequent change in the VAT liability of the supplier is in practice accepted if the following conditions are cumulatively met:

1. the third party suffers a definite loss of receivables by not receiving the nominal value including VAT from the service recipient

2. the (residual) claim is definitely uncollectible because further collection measures are objectively no longer possible. This is particularly the case if

• the beneficiary has repurchased the loss certificate from the third party
• the beneficiary, if it is a legal person, has been deleted from the commercial register, or
• the (residual) claim is statute-barred.

(3) In the contract for the purchase of receivables or the contract of assignment, the service provider and the third party agreed at the time that the third party would notify the service provider in writing at the appropriate time and confirm to the service provider in writing with reference to the precisely specified receivable that (a) the receivable in question has definitively ceased to be part of his assets within the meaning of FTA practice and (b) he has suffered a definite loss of the receivable in the amount specified.

3.3.2 Criticism of administrative practice

3.3.2.1 Mistaken principle

In accordance with administrative practice, bad debts in transactions involving monetary claims are assumed by third parties and not charged to the service provider, which is why they cannot be claimed by the service provider as reductions in remuneration.

The consequences of this principle will be illustrated by the following facts.

A claim for a service provided in Switzerland of CHF 1,077 (incl. 7.7% VAT) is sold by the service provider and creditor to the buyer of the claim at a price of CHF 900, who then collects the claim himself. The buyer only manages to collect CHF 100.

In the example, the debt purchaser realizes a loss of at least CHF 800 (capital loss plus any expenses for unsuccessful collection efforts). According to administrative practice, the service provider and cedant could in principle not claim a reduction in remuneration (not even from CHF 1,077 to CHF 900). Thus, the service provider would have to pay CHF 77 VAT to the tax authorities, although the debtor only spent the amount of CHF 100 on the receipt of the service and thus paid VAT of CHF 7.15 (100 / 107.7 x 7.7).

In principle, it must be taken into account that according to Art. 1 para. 1 sentence 2 MWSTG, the purpose of VAT is to impose a tax burden on non-entrepreneurial final consumption in Switzerland (so-called tax burden concept).16 Taxation should be based on the fact that a non-entrepreneur consumes a service. However, this statement has to be put into perspective several times, because actual consumption is difficult to determine.17 This practical implementation problem has the consequence that the situation envisaged by the VAT (so-called tax object) and its tax object are different.18 The legislator had to work with various fictions in order to get as close as possible to the actual goal - the taxation of non-business end consumption. As a central fiction, the legislator assumes consumption only if a person spends assets on it.19 Accordingly, the term "consideration" is defined as an asset that the recipient, or a third party in its place, pays to receive a service.20 If the fact that the debtor paid a smaller fee for the withdrawal than the service provider demanded of him was disregarded, the entire concept of the burden changed. This would mean that the entrepreneur and not the consumer would bear the tax burden, which would be incompatible with the purpose of VAT (taxation of non-entrepreneurial final consumption; Art. 1(2) MWSTG) and the principle of transferability (Art. 1(3)(c) MWSTG).

The question then arises as to why the FTA also refuses to reduce the fee to the extent of the actual capital loss (CHF 177 [CHF 1,077./. CHF 900]) suffered by the seller of the receivables. However, this administrative practice is system-compatible on the basis of the following considerations:

A claim is nothing more than a right to payment and thus capital which can be used for consumption purposes. If capital is spent on the acquisition of consumable goods, it constitutes a consideration and a VAT-relevant service relationship arises. If capital is merely exchanged for capital, there is no performance relationship relevant for VAT purposes. The Federal Supreme Court thus also recognises that the actual movement of capital in credit transactions does not constitute a service, but the granting of credit against interest, namely the transfer of capital over a certain period of time with the obligation to repay.21

In other words, in our example, the sale of the receivable with a nominal value of CHF 1,077 at a price of CHF 900 is irrelevant from a VAT point of view, since only capital is exchanged for another form of capital. On the other hand, the service provided by the purchaser of the receivables to the service provider is relevant for VAT purposes. In the present case, this consists of a financing service which the buyer of the claim provides to the service provider and for which the buyer of the claim demands compensation of CHF 177 (CHF 1,077./ CHF 900).22

The buyer of the receivables does not establish a value-added tax service relationship with the debtor. Accordingly, payment by the debtor cannot be regarded as payment in the VAT sense from the point of view of the purchaser of the claim.23 On the other hand, from the debtor's point of view, the sale of the claim cannot influence the original exchange of services, especially since the debtor receives a new creditor but, in particular, no new contracting party. Consequently, from the debtor's point of view, the amount paid by him to the purchaser of the claim must continue to be regarded as remuneration from the service relationship with the service provider.

This alleged conflict can only be resolved in a system-compliant manner by ensuring that the amount received by the buyer of the claim is regarded as remuneration, but taxation and thus any adjustment is carried out by the seller of the claim or the service provider. This also corresponds to German teaching and case law.24

This solution stands up to the wording of Art. 24 (1) sentence 1 MWSTG, especially since the provision merely states that the tax is calculated from the remuneration actually received, without determining who must be the recipient of the remuneration. Accordingly, Art. 24 (1) sentence 1 MWSTG does not prohibit taking into account the viewpoint of the debtor or a third party. Consequently, a third party (e.g. the buyer of the claim) may also receive a remuneration, but the taxation and adjustment must not be carried out by him, but by the original service provider.

This solution is also in line with the doctrine and the case law of the Federal Supreme Court.25 It is then consistent with the nature of VAT, in particular with the purpose of the provision of Article 15(4) of the VAT Act: "Where a taxable person assigns claims arising from his business to third parties, the latter shall be liable in a subsidiary manner for the VAT which is co-excessed with the claims if, at the time of assignment, the tax debt to the FTA has not yet arisen and a certificate of loss is available". The scope of the liability is specified in Art. 24(1) of the VAT Treaty as follows: "Liability under Art. 15(4) of the VAT Act shall be limited to the amount of VAT actually collected during execution proceedings against the taxable person from the date of attachment or from the date of the opening of bankruptcy proceedings by the assignee".

The provisions of Art. 15(4) MWSTG and Art. 24(1) MWSTV serve to avoid losses of VAT which arise because the seller of the claim is often no longer in a position to pay the VAT owed by him because the claim purchaser has collected the claim. However, the purchaser of the claim, who is not obliged to pay the VAT, which is a civil law component of the assigned claim, to the FTA, becomes subsidiarily liable on the basis of this provision, provided certain conditions are met. Consequently, the legislator wanted to ensure that at least those VAT debts are secured which the debtor (recipient) has also paid. In other words, the legislator wanted the remuneration actually paid by the debtor to be subject to taxation, regardless of to whom the debtor pays the remuneration. If the debtor makes a payment not to the original supplier but to the purchaser of the claim, the latter may be liable for the VAT due on a subsidiary basis. Nevertheless, the original supplier and seller of goods and services remains primarily liable as the person liable for VAT.

However, the proposed solution poses a practical problem in that the original service provider and seller of the claim usually does not know whether and to what extent the debtor will pay the claim. If the original service provider and seller of the claim cannot sufficiently demonstrate to the FTA whether and to what extent the claim was paid to the purchaser of the claim, the seller of the claim runs the risk of lack of evidence with the result that he cannot claim a reduction in payment.

In other words, contrary to the view of administrative practice, there is in principle a right to a reduction in remuneration, even if the loss of receivables does not affect the service provider but the purchaser of the receivables. Consequently, the service provider - to stay with the above example - would be entitled to claim a reduction in remuneration of CHF 977 (CHF 1,077 ./. CHF 100) from the FTA.

The fact that the risk of loss of receivables is transferred from the service provider to the assignee in the sale of receivables has no effect on the performance relationship between the original service provider and the service recipient. The bearing of the risk of a loss of receivables relates exclusively to the service relationship between the service provider and the purchaser of the receivables and not to that between the service provider and the recipient. Since the assignment cannot change this, any loss of receivables - as in the case without assignment of receivables - must result in a tax adjustment. The fact that this tax correction must be made at the supplier's premises has been noted above.

3.3.2.2 Excessive requirements for the reduction of charges

As already explained above under point 3.4.2.1, the administrative practice according to which the seller of the claim has no claim to correction in principle already contradicts the principle of the charging concept of VAT. The FTA seems to be aware of this, otherwise it would hardly allow a reduction in remuneration in exceptional cases.

The FTA requires that the bad debt is definitely uncollectible because further collection measures are objectively no longer possible. In extremis it would not be sufficient, according to administrative practice, to have a loss certificate. Rather, it would still have to be statute-barred, which according to Art. 149a SchKG is only 20 years after issuance.

This administrative practice has no basis whatsoever and also contradicts the general rule recognised by the FTA, according to which reductions in remuneration may be made if the service provider has written off the claim in his books.26 The author does not see why the requirements for the claim to a reduction in remuneration after an assignment of claims should be completely different. The administrative practice is contrary to the system and the law.

The risk of the service provider claiming an excessive reduction in remuneration could be reduced or even eliminated if the purchaser of the claim were to confirm in writing to the service provider the extent to which the debtor made a payment and that further collection measures would be waived. It goes without saying that the purchaser of the claim would have to inform the service provider if the debtor were to make a payment at a later date, so that the service provider could in turn make a correction at his expense.

4th conclusion

Subsequent changes to the VAT liability and the input tax deduction are regulated in Art. 41 VAT Act. A reduction in remuneration is to be made when the correction has been posted or when the corrected remuneration is collected. Therefore, the posting made must be correct under commercial law. No further requirements are necessary. Administrative practice does not follow this view in cases where a claim is assigned which is ultimately not or only partially repaid. The administrative practice is contrary to the system and the law and should therefore be abandoned.