Pitfalls in the application of the Postponed (Import) VAT Accounting Procedure

The Swiss Federal Supreme Court recently ordered an art collector to pay back import taxes of around CHF 11 million plus interest on arrears of around CHF 2.5 million. In fact, the judgement concerned the period from 2008 to 2013, which means that the old legal provisions were applied in the case. However, the current provisions of the VAT Act do not deviate from these, which is why the judgement remains valid under the current law.

BACKGROUND

Background was that the import into Switzerland was carried out by a gallery that had a permit to use the Postponed VAT Accounting Procedure. Apparently incorrectly, because as the court confirmed in its ruling 2C_219/2018 of 27 April 2020, only the person who has the economic power of disposal over the imported goods immediately after the import is entitled to act as importer of records. The fact that the gallery had the power of disposal over the works was denied in the present case and as a result the art collector, who actually had the power of disposal at the time in question and therefore should have acted as the importer of records, was obliged to pay the import taxes.

What ist the postponed (import) VAT Accounting Procedure?

By application of the Postponed VAT Accounting procedure, the importer does not pay the import tax to the Swiss Federal Tax Authorities (FTA), but declares it on a separate form as part of the corresponding quarterly VAT statement and at the same time claims it as input tax (which is why no money flows). According to the Swiss Federal Supreme Court, the application or approval of the Postponed VAT Accounting Procedure does not result in a shift of competence from the Swiss Customs Authorities to the FTA with regard to the collection of import taxes; rather, it is a pure payment method that enables the taxpayer to optimize its cash flow. The application of the Postponed VAT Accounting Procedure is linked to various cumulative requirements, which are listed in particular in Art. 118 of the Swiss VAT Ordinance. These include that the authorization holder is liable to pay tax in Switzerland.

In the case assessed here, the art collector was not registered for VAT in Switzerland, which is why he himself did not have a permit to apply the Postponed VAT Accounting Procedure and was generally also not entitled to recover input tax.

Who can act as an importer of records?

In principle, and irrespective of the application of the Postponed VAT Accounting Procedure, it applies on the basis of customs legislation that the only person who can be a lawful importer of records is the person who can economically dispose of the imported object immediately after importation. In concrete terms, this means that the importer must be entitled to consume or use the object himself or to resell it in his own name (e.g. as part of a commission agreement). Or as the CJEU puts it: Economic power of disposal means being able to dispose of an object in the same way as an owner.

As the holder of an authorization for the application of the Postponed VAT Accounting Procedure acts as an importer of records when he uses it, it is assumed that he also has the power of disposal over the relevant objects. Only then is the use of the authorization considered to be in conformity with the rules. It should be noted that proof of this must be provided in the form of suitable business documents (e.g. contracts, supplier invoices). Simply presenting the authorization to use the Postponed VAT Accounting Procedure is explicitly not sufficient. It must be possible to prove in some other way that the object was under the right of disposal of the importer of records at the time of importation and that the license holder therefore indeed qualifies as a lawful importer of records.

In the present case, the gallery used its authorization to apply the Postponed VAT Accounting Procedure to import the various works of art and thus acted as importer of records. To prove that it also had the power of disposal, it referred to various commission agreements according to which the gallery was to resell the works in its own name. However, the Federal Supreme Court considered it proven that these commission contracts were merely simulated, essentially with the aim of being able to use the authorization for the gallery to apply the Postponed VAT Accounting Procedure for the import of the works (and thus to benefit not only from the cash flow advantage, but also from the fact that the gallery reclaimed the import taxes as input taxes). There were several indications that the contracts were merely simulated, including the fact that a large number of the works of art were exhibited after importation on behalf of the art dealer in his private premises or in a hotel he owned (which makes a sale by the gallery more difficult), the gallery did not always know the correct location of the works of art, and ultimately none of the works of art was ever sold (in one case, a purchase request was even rejected).

Consequence for the present case

Since the commission contracts were merely simulated transactions, the implementation of which was never intended by either of the parties, the gallery also at no time had the power of disposal over the works of art in question for which it used the Postponed VAT Accounting Procedure. In fact, the power of disposal remained with the art collector throughout, who regularly also arranged the imports, so that he is considered the principal (importer of records) and debtor under customs law. By faking commission transactions with the gallery, which subsequently acted as importer of records, he had violated his duties as a person liable to customs and breached federal administrative legislation. In addition, the gallery recovered the invoiced import taxes as input tax in its quarterly VAT returns. As a result, the federal government incurred a tax loss in the amount of the import tax originally owed according to Art. 63, para. 1 of the Swiss VAT Law. This is because if the import had been carried out correctly by the art collector and the import tax had been paid by him, the import tax would also have remained with him as a definitive expense.

CONCLUSION

Once again, this case shows the importance of careful (and in this case also truthful) documentation and internal organization of certain processes. With the necessary compliance structures and an ICS (Internal Control System) for VAT, the risks of incorrect application of a legal procedure or systematic wrong decisions could be reduced. After all, it does not always have to be criminal energy that leads to considerable VAT assessments. It is sufficient, for example, that the legitimate importer of records is accidentally not recorded to result in serious consequences.

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DAS FH in SWISS VAT/MWST
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