On the conditions for tax remission under Art. 92(1)(a) MWSTG

1. facts of the case

Escort GmbH (the complainant [BF]), with its registered office in Geneva, has been operating an escort service since 2002, primarily for clients residing abroad.

In July 2012, the FTA, HA MWST, (FTA) carried out an inspection of the tax periods 2007 to 2011 at the BF, taking the view that the BF fulfilled the conditions for compulsory tax liability since 1 January 2007, which led to retroactive registration in the VAT register and offsetting of CHF 193,765 for the tax periods 2007 to 2009 and CHF 115,066 for the tax periods 2010 and 2011. The FTA justified this as follows:

• Contrary to the qualification under social security law, the FTA did not consider the companions who worked for the BF as self-employed from a VAT point of view, but rather as employed. She subsequently allocated the income of the companions to BF for VAT purposes.
• In addition, the FTA stated that the escort services provided were to be taxed at the registered office of the service provider, i.e. in this case at the BF in Geneva (Art. 14 para. 1 aMWSTG and Art. 8 para. 2 lit. a MWSTG).
  Both the BVGer (judgments A-786/2013 and A-777/2013) and the Federal Court (judgment 2C_850_2014) protected the view of the FTA. A final judgment has therefore been passed on the disputed claims.

In June 2016, the BF was again submitted to the FTA with an application for remission of the tax claims as well as the default interest owed based on Art. 92 para. 1 MWSTG. With regard to the tax periods 2007 to 2009, the FTA did not accede to the request, while it rejected the application for the tax periods 2010 to 2011. The BF appealed to the Federal Administrative Court (BVGer) in accordance with Art. 92, para. 3 of the VAT Act, which partially upheld the appeal in ruling A-361/2017 of 30 October 2018.

2. tax periods 2007 to 2009: Retrospective application of the new law?

The extended possibilities for tax relief came into force on 1 January 2010. With regard to the tax periods 2007 to 2009, it would therefore be advantageous for BF if they were already applicable to tax claims arising before 2010.

Excursus: It is interesting to note that the draft of the new VAT Act under Art. 112 para. 3 E-MWSTG on applicable law had still provided that the provisions on tax remission should also apply to claims that arose before the Act entered into force. In its contested decisions, the FTA as the lower court had based its appeal on a passage in the Federal Council's dispatch on the simplification of VAT on Art. 112 para. 3 E-MWSTG01 and therefore applied Art. 92 MWSTG retroactively also to the tax periods 2007 to 2009. However, it refused to grant a tax remission on the grounds that the conditions of Article 92 of the VAT Act were not met. Since the article on applicable law (Art. 113 MWSTG) had been completely reworded in the final version of the VAT Act and no longer contained the retroactive provision of Art. 112(3) E-MWSTG, the SNB does not consider it appropriate to apply the reasoning in the message (ruling A-3469/2010 of 15 April 2011, E.2.2.4).

In principle, the previous provisions of the law remain applicable to all facts or legal relationships that arose before the law came into force (Art. 112 MWSTG). On the other hand, subject to Art. 91 of the VAT Act on the reference period of limitation, the new procedural law is applicable to all proceedings that are still pending at the time of entry into force. In accordance with the practice of the SNB, this provision must be interpreted narrowly in that it applies exclusively to pure procedural law, as otherwise it leads to a prohibited retroactive effect of substantive law. The provisions of Art. 92 of the VAT Act concerning tax remission were not classified as purely procedural by the SNB in a previous ruling (ruling A-3469/2010 of 15 April 2011, E 2.2). The SNB bases its argumentation on the case law of the Federal Supreme Court and the SNB on the remission of customs duties and VAT on imports in connection with the introduction of the new Customs Act 2007 and the new VAT Act 2010 respectively, all of which considered the provisions on tax remission to be part of substantive law. Therefore, the provisions of Art. 51 aMWSTG are to be applied for the assessment of a possible tax remission for the tax periods 2007 to 2009.

Since under Art. 51 aMWSTG a tax remission was only possible in the context of judicial probate proceedings, the SNB in the present case rejects a tax remission for the tax periods 2007 to 2009 (E. 6.2).

3. tax periods 2010 to 2011

3.1 Conditions for a tax remission in accordance with Art. 92(1)(a) MWSTG

The new VAT Act and therefore its Art. 92 on tax remission is applicable to tax claims arising from 1 January 2010 onwards. In the present case, the granting of a tax remission would be conceivable solely on the basis of Article 92(1)(a) of the VAT Act (excusable reason). The following conditions would have to be met:

• VAT was neither invoiced nor collected;
• this happened for an excusable reason. According to the Message on the VAT Act (BBl 2008 6885, 7013), this is the case if the taxpayer was in error regarding the tax liability and another person would have acted in the same way under the same conditions;
• a subsequent rollover of the tax is not possible or not reasonable;
• the payment of the tax would mean a great hardship;
• Finally, and as a basic requirement, there must be a tax claim that has been legally established.

In the present case, it is established that 1) the VAT was neither invoiced nor delivered, 2) this was due to an error (and not intentionally), and 3) there is a legally binding tax claim based on the ruling of the Federal Court 2C_850_2014.

The BF or their companions have many different and also irregular customers, often resident abroad, who regularly pay with cash. In view of this constellation, the BVG considers a subsequent rollover of VAT to be impossible or unreasonable (E 6.2.5).

3.2 When is an error excusable?

In its core area, the judgment of the BVGer deals with the question whether the mistake of BF was excusable.

Even though VAT has been structured since 2010 as a modified self-assessment tax rather than as a pure tax, it still places high demands on the knowledge of the (potentially) taxable person: this knowledge should be provided by law, ordinance and administrative practice, and even by the highest courts.02 and keep up to date with any changes. The principle that ignorance of the legal situation does not protect against its consequences is therefore particularly pronounced in VAT law, but, according to the BVGer, it refers above all to the existence of the tax claim: a tax claim exists regardless of whether a taxpayer is aware of the relevant legal basis. If, says the SNB, the same strict criteria were also applied to the excusability of an error in the case of a tax remission, such an error could never be assumed and Art. 92(1)(a) VAT Act would be meaningless (E 6.2.6.2).

After analysing the legal situation as it stands in 2010 and 2011, and in particular the Federal Supreme Court's rulings on erotic studios and massage parlours with regard to the distinction between self-employed and employed activities, the BVGer concludes that the rulings are undoubtedly relevant for clarifying the question of whether a tax claim exists. However, that question has already been definitively clarified and cannot therefore be discussed in the present proceedings. With regard to the question of whether there is an excusable error under Article 92(1)(a) of the VAT Act, these judgments cannot be applied to the BF without further ado, since the BF is active with its escort services in a different environment and the situation is therefore not sufficiently comparable (E 6.2.6.1).

In response to the FTA's argument that BF should have followed the published case law, the SNB analyses the comments on (un)self-employment set out in leaflet 02, point 1.1 (French version):

• Version published on 1 January 2010: "Si une activité est qualifiée d'indépendante par les administrations de sécurité sociale (AVS) ou par d'autres autorités fiscales (impôt sur le revenu), cela s'applique également pour la TVA.
• Version published on 10 October 2013: "C'est la raison pour laquelle la qualification retenue par les autorités correspondantes constitue un indice déterminant pour l'appréciation du point de vue de la TVA.

The BVG states that both versions of the published practice do not correctly reflect the practice of the supreme court, which states that "... the statut au plan des assurances sociales et en matière d'impôts directs constitue un indice, mais n'est pas déterminant à lui seul...". If not even the FTA, as the enforcement body for VAT, is capable of correctly transposing the practice of the supreme court into published administrative practice, the BF cannot be required to correctly apply this judicial practice (E 6.2.6.5). Although in the eyes of the SNB it is inconceivable ('pas concevable') that an excusable error automatically follows from a wrong instruction of the FTA, the extraordinary circumstances at hand did not allow any other conclusion than the assumption of an excusable error.

The FTA's argumentation that there is a reference on its homepage to the fact that taxpayers should contact the FTA in the event of an "incertitude relative" regarding the tax assessment of a business case, which per se precludes the assumption of an excusable reason, is rejected by the BVG in great strictness: the wording of the FTA's cited written practice leaves no room for "a certain degree of uncertainty", and the FTA's argumentation therefore lacks fundamental coherence (E 6.2.6.5).03

The BVG also affirmed the existence of particular hardship, arguing that if both the tax claim of period 1 and that of period 2 had to be paid, the company would be over-indebted (Art. 725 OR) and its existence would be threatened. Even if only the tax receivable for period 2 is taken into account, it still represents a substantial threat to the company.

Based on this, the BVG granted the BF a tax remission for the period 2010 and 2011. Decisions on deferral and remission of tax claims cannot be referred to the Federal Supreme Court (Art. 83 lit. m FSCA), which is why the BVG has made the final decision in this case.

4. assessment of the judgment

The ruling discussed here is one of the few, if not the only case judged by a court in which the conditions for a tax remission according to Art. 92 (1) lit. a MWSTG are fortunately considered to be fulfilled. In the following, some aspects of this judgement will be examined in more detail.

4.1 Ignorantia iuris nocet - with different weightings

Where the existence of the tax claim is at stake, the principles of legality and equal treatment of all taxpayers are paramount. The principle that ignorance of the law is detrimental serves as an objective criterion here: if a taxpayer does not know about his tax liability, this does not in principle, i.e. with the exception of cases of protection of legitimate expectations, have any influence on the existence of the tax claim.

The concept of excusable error under Art. 92(1)(a) VAT Act contains per se a component, albeit not exclusively subjective, in that excusability is assumed if other persons would have acted in the same way under the same conditions. The principle of legality and the principle of equal treatment are thus relegated to the background in favour of a stronger emphasis on the subjective aspect. If this were not the case, and if the same criterion were applied to the question of whether a tax remission could be granted as to the existence of the tax claim, Article 92(1)(a) VAT Act would be obsolete, which was clearly not what the legislator intended.

4.2 What knowledge may be required of a taxable person?

After examining the various judgments of the Supreme Court on erotic studios and massage parlours, the BVGer concludes that these could not be held against BF in connection with the excusability of its error, since they refer to a different context. These remarks of the SNB do not appear conclusive, if only because there are also judgments of the highest courts which explicitly deal with escort services. The SNB should therefore have included these judgments in its analysis.04 Moreover, these are, after all, establishments that offer sexual services in the broadest sense and operate according to similar principles.

Above all, however, the above argument proves to be unnecessary, since according to the BVGer, the BF cannot be required to be aware of a practice of the highest court, which was not correctly reflected by the FTA in its written practice. As a consequence, this means that as soon as a clear written practice of the FTA is available, a taxpayer without specialised VAT knowledge cannot be required to additionally deal with the highest court practice. According to the BVG, however, it is unthinkable that the FTA should automatically be excused for an error if the instruction is incorrect. In the opinion of the author, this is not correct: if the taxpayer follows a clearly formulated practice of the FTA which subsequently proves to be incorrect, this is sufficient for the assumption of an excusable error. The taxpayer must be able to expect the FTA to follow the principle of legality and to correctly reflect court practice in its administrative practice.

4.3 Conclusion

The present ruling of the BVGer is generally positive and represents a step in the right direction. It is to be hoped that future judgments of the SNB regarding the existence of an excusable error will lead to a comprehensible practice that is in line with reality.

4.4 Protection of legitimate expectations - existence of the tax claim

The question arises whether a case of legitimate expectations could or should not have been assumed at the level of the existence of the tax claim.0506

First and foremost, this requires a basis of trust: This is a state act, the degree of certainty of which is so great that private individuals (both individuals and companies) can extract from it the information that is essential for their dispositions.07 These can be concrete orders and decisions, but also, for example, generally applicable administrative and judicial practice. In the present case, the relevant administrative practice of the FTA was formulated so clearly (incorrectly) in French that the SNB saw no room for uncertainty in connection with the clarification of the question of whether an excusable error existed, on the basis of which the SNB should have turned to the FTA for further inquiries. The existence of a basis of trust can therefore hardly be doubted.08

Due to the clear administrative practice of the FTA, the BF assumed that it was not subject to mandatory VAT, which is why it did not register in the Swiss VAT register, resulting in a corresponding additional claim by the FTA. Due to the customer structure of BF (many different foreign customers without Swiss VAT registration), the subsequently assessed VAT could not be passed on to the beneficiaries. If administrative practice had been correct, registration could have been made in time and VAT could have been passed on accordingly.

Furthermore, protection of confidence can only be invoked by those who did not know or could not have been expected to know of a possible flaw in the basis of confidence. The latter must be assessed on the basis of the individual skills and knowledge of the persons concerned.09 The above-mentioned practice of the FTA states that the qualification under social security law as an (in)self-employed person is decisive for the VAT qualification. Linking it to the qualification under social security law makes perfect sense and in other words is not so absurd that the defectiveness should have been obvious.

Can a taxpayer who is not engaged in tax consultancy or who specialises in VAT matters now be expected to have recognised the incorrectness of the practice of the FTA? Would it have had to carry out further research, such as consulting the Italian or German versions, or familiarise itself with the case law of the highest courts in all three national languages, despite the clear wording?10 Can she be reproached for not having consulted a tax adviser who is proficient in all three languages and, if not, for having confidently turned to a contact in the other part of the country to check the possible incorrectness of the FTA's practice? The answer to this question is in fact obvious: such expectations would be unrealistic and would in turn place the entire responsibility for the correct application of VAT on the part of taxable persons, as was the case under the VAT Act. It must therefore be sufficient for taxpayers, at least those without specific knowledge of VAT, to consult the written practice of the FTA. If it is clearly formulated, the taxpayer cannot be accused of having had to obtain further information.

If one comes to the conclusion that the conditions for the protection of legitimate expectations are in principle fulfilled, the interest of BF must be weighed against the public interest in the application of correct practice.

According to the practice of the Federal Supreme Court, the protection of confidence in the area of tax law is only of limited application,11 as the principle of legality is given a higher weighting. Consequently, the interest of the tax authorities in enforcing the applicable law is regularly given greater weight than the taxpayers' equally constitutional right to protection of legitimate expectations in official assurances or other conduct of the authorities that gives rise to certain expectations.

However, this understanding of the principle of legality is one-sided, as its main purpose is to make all administrative activities subject to the law.12 This is intended to ensure legal certainty and equality of rights as well as the protection of the individual from state intervention. Moreover, the principle of legality fulfils a democratic function in that administrative action is based on a law adopted with the participation of the people or parliament, due to the requirement of legal form.13 If the administrative practice of the FTA does not correctly reflect the judicial practice, the FTA violates the principle of legality. It is incomprehensible why such acts are regularly protected, while taxpayers are denied protection of legitimate expectations. It seems that the administration and the taxable persons are measured with different cubits.

The general experience of life shows that erroneous actions that regularly remain unsanctioned are usually not corrected, but on the contrary, the error rate increases. In other words, the FTA has no incentive to formulate its administrative practice more carefully or to adopt case law promptly and correctly if the courts regularly rule in favour of the FTA and to the detriment of taxpayers in such cases as well. However, this is not acceptable: Taxpayers' confidence in a competent tax authority that acts diligently and in accordance with coherent principles and takes responsibility for its actions, i.e. also for its mistakes, is a central aspect of tax morale and citizens' confidence in the State. If taxpayers have to answer for their own mistakes as well as for the mistakes of the FTA, this can lead to feelings of powerlessness and disenchantment with the state. This is particularly true in cases such as the present one, where taxpayers can rightly ask themselves what in heaven's name they should have done in order to process VAT correctly. If this aspect is emphasised, greater weight should be given to the protection of confidence.