Switzerland Expects VAT Reform

The Swiss Federal Council intends to draw up plan for a new value-added tax (VAT) model comprising of just two tax rates instead of current three rates.

The Swiss National Council tasked the Federal Council with drafting plans for a VAT reform, stating that the new model is to be based on one reduced VAT rate and on a standard VAT rate. The National Council also stipulated that a reduced rate of VAT should apply to services provided in Switzerland's restaurant and hotel accommodation sectors, with the exception of alcoholic drinks and tobacco, and that certain VAT exemptions should be abolished.

Now the Federal Council aims to launch discussions regarding the actual number of goods and services to be subject to the reduced VAT rate. According to the Federal Council, if services within the catering and hotel accommodation industry are to benefit from a reduced VAT rate, the measure will result in an annual shortfall of tax revenues for the state of between CHF 760 mln (USD 837 mln) and CHF 810 mln.

The Federal Council considers that this shortfall should be entirely compensated within the framework of the VAT system by increasing as necessary the reduced VAT rate. The future reduced VAT rate will be between 2.8% and 3.8%. In this way, the impact of the VAT reform on households will be relatively small.

The first part of the VAT reform, which entered into force in Switzerland on January 01, 2010, entailed plans to reduce the administrative burden on companies. The second part of the reform is designed to simplify the VAT system.