Legal basis for interpretation
Basic information
If the parties have not regulated whether VAT may be charged to the recipient in addition to the agreed price, different legal bases must be used to assess the question depending on the parties involved. Contractual relationships involving a consumer (also known as B2C) are treated differently from those between companies (B2B). However, it should be noted at this point that the following remarks refer in particular to cases in which the parties have not subjected the transfer to any contractual regulation.
Services to consumers (B2C)
The freedom of contract, which is laid down in the Swiss Code of Obligations (OR), is restricted by the Federal Act against Unfair Competition of 19 December 1986 (inter alia Art. 6 UWG) and the Price Disclosure Ordinance (PBV) based on it,5 insofar as, among other things, goods and certain services are offered to consumers. According to Art. 2 para. 2 PBV, consumers are persons who purchase goods or services for purposes that are not related to their commercial or professional activities. Specifically, Art. 16 UWG is intended to ensure that the prices indicated correspond to the prices actually payable (including applicable taxes and fees). Art. 16 UWG thus directly serves to protect consumers.06 Art. 4 Par. 1 PBV for goods and Art. 10 Par. 2 PBV for certain services stipulates that passed-on public charges must be included in the detailed price. These public charges include value added tax.07
Consumers may therefore generally assume that the price offered includes VAT (i.e. VAT is included in the price and cannot be charged additionally).08
Services to companies (B2B)
On the other hand, there is no specific provision in the current legislation concerning the interpretation of price agreements between undertakings.09 If there is no clear contractual agreement on the payment of VAT, Art. 18 para. 1 of the Swiss Code of Obligations requires that the real, concurring will of the parties be determined. If this does not succeed, the declarations of intent of the parties must be determined according to the principle of trust in the sense of an objective interpretation.10 In the objective interpretation, the Court of First Instance determines how reasonable and honest parties would have settled the question of passing on VAT in the circumstances.11 It is therefore a question of establishing the will of the parties which they would have had if they had settled the matter.12 This is further based on good faith,13 the preliminary negotiations,14 the previous business relationship15the contractual and pricing arrangements customary in a given industry and, more generally, on the basis of all documents and information in the specific case16 to determine.17
Some authors argue that in business transactions between companies, there is a basic presumption that the agreed prices do not include VAT, since the taxable customer can usually deduct the invoiced VAT as input tax on the basis of Art. 28(1)(a) MWSTG, unlike the consumer, and thus does not represent an additional financial burden for him.18
However, Gauch also expresses the opposite view (at least with regard to agreed flat-rate or unit price remuneration for the execution of a work or services), namely that there is no presumption that the trader can charge VAT in addition to the agreed price. A general practice according to which VAT can always be claimed separately has not yet been established.19
According to the view taken here, there is no presumption that VAT can be charged in the business sector in addition to the agreed price. A corresponding assumption, as mentioned in the teaching, is without any foundation.
It should be noted, however, that a judge, when filling a gap in a contractual relationship, should bear in mind that in most cases the recipient of the service can reclaim the VAT and therefore, in the absence of a regulation, the VAT should be understood as not being included in the price. Indeed, it would be agreed by reasonable and bona fide parties.
The author further suggests that a legal presumption is included in Art. 6 of the VAT Act for companies, according to which it is always to be assumed between parties liable to VAT that the price of a service subject to VAT does not include VAT (i.e. is not inclusive) in the absence of VAT arrangements between the parties. This means that in the absence of VAT rules, the supplier may charge additional VAT. It is then up to the recipient of the service to prove that the parties have considered the VAT to be inclusive and that he does not owe the supplier any additional VAT.
Let us now turn to three case studies which illustrate the consequences of the above-mentioned design principles:
Case studies
Case 1: Contractual relationship with participation of a consumer
X is a hobby footballer and orders a pair of football shoes on the Internet, which are priced at CHF 200. When X receives the football shoes two days later, he is surprised by the enclosed invoice for CHF 216. The sports shop where X ordered the shoes is of the opinion that the agreed price is exclusive of VAT and therefore charged X an additional CHF 16 VAT. X does not want to pay the CHF 16 and wonders whether he will have to put up with this transfer of VAT.
X is a consumer within the meaning of Article 2(2) PBV, since the purchase of the football boots is not connected with his commercial or professional activity.
On the basis of Art. 4(1) PBV, X may assume that VAT is included in the price indicated.
It follows that X only has to pay the amount of CHF 200. Due to the content of the price agreement (CHF 200), the value added tax cannot be passed on to X and must be paid by the sports shop.
Case 2: Contractual relationships between businesses entitled to deduct input tax
X AG manufactures components of X-ray equipment, which it sells to Y AG. The main activity of the buying Y AG is to assemble the X-ray machines and then resell them to Swiss hospitals. There is a long-standing business relationship between X AG and Y AG. In each case, payment was made as agreed. The value added tax was therefore included. Additional claims were never asserted by X AG. As usual, Y AG buys components at an agreed price of CHF 25000 from X AG. X AG now sends Y AG an invoice for CHF 27000 (agreed price of CHF 25000 plus VAT in the amount of CHF 2000). Y AG would like to know whether it has to pay the additional CHF 2000, although a price of CHF 25000 was agreed. The activity of Y AG allows a full input tax deduction in accordance with Art. 28 para. 1 lit. a MWSTG. If there were a legal presumption with the content shown above, Y AG would have to pay CHF 2000 value added tax. As explained above, such a legal presumption does not exist today and the passing on of VAT is to be assessed solely on the basis of the principles of interpretation set out above.
On the basis of good faith, Y AG can assume in the present case that the agreed price includes VAT, as this had been the case with previous purchases. Consequently, Y AG does not have to pay the additional CHF 2000. The value-added tax is included in the agreed purchase price of CHF 25000 as inclusive.
This solution assumes that the parties do not subsequently wish to agree to correct the invoice in accordance with Art. 27(4) of the VAT Act and VAT form 1550_01/11.14. This would also be possible in principle, as Y AG would have full input tax deduction and could reclaim the additional VAT transferred to X AG from the FTA.
Case 3: Contractual relations between businesses with limited right of deduction for the recipient of the services
A Swiss hospital buys an X-ray machine from Y AG. The agreed purchase price is CHF 50000, the hospital is purchasing from Y AG for the first time. A corresponding contractual provision with regard to VAT was inadvertently not included in the contract and was not mentioned elsewhere. The hospital now receives an invoice for CHF 54000 (agreed purchase price plus VAT). Does the hospital have to pay the value added tax?
In the present case, most of the services provided by the hospital fall within the excluded scope of application of Art. 21 (2) No. 2 MWSTG, which limits the possibility of deducting input tax. The hospital receives a service that is subject to input tax and has to bear the majority of the input tax (Art. 29 para. 1 MWSTG in conjunction with Art. 21 para. 2 item 2 MWSTG), which means that the hospital is economically burdened by the input tax.20
The civil law transfer of VAT is to be assessed by the judge solely on the basis of the principles of interpretation described above. The preliminary negotiations do not suggest that the parties' willingness to pass on the VAT to the hospital has waned. Furthermore, the additional payment of CHF 4,000 would affect the hospital economically, as it can only reclaim this payment to a very limited extent. Consequently, it is also very difficult for a court to decide whether or not the hospital has to pay the CHF 4,000 extra. In other words, even an objective interpretation has its limits and it is not clear how reasonable and honest parties would have settled the question of passing on VAT in the circumstances.
If, on the other hand, there were a new legal presumption in Art. 6 of the VAT Act with the content described above (VAT is not included in business transactions), it would also apply in this scenario and the hospital would have to pay the agreed CHF 50000 and an additional CHF 4000 VAT.
Bottom line
Due to the UWG and PBV, prices agreed with consumers must in most cases include value added tax.
The situation is different for companies: If the parties have not reached an agreement, it must be determined, if necessary by a civil court, on the basis of the above-mentioned principles of interpretation, whether or not the price includes VAT.
Contrary to doctrinal opinion, there is still no presumption that the agreed price in business transactions does not include VAT.
It is therefore to be hoped that de lege ferenda in Art. 6 of the VAT Act will include a legal presumption according to which it can always be assumed between parties liable to VAT that the price of a service subject to VAT does not include VAT and can be charged additionally in the absence of VAT regulation between the parties. This means that in the absence of VAT rules, the supplier may charge additional VAT. As a result, the VAT payer is no longer left alone with problems of passing on the tax in business transactions.
