VAT to stabilize Swiss Old Age Insurance (AHV; AVS) VAT to stabilize Swiss Old Age Insurance (AHV; AVS)

On 17 December 2021, both the National Council and the Council of States voted in favor of an increase of the VAT rate. This decision was part of the reformation of the Swiss pension system, the so called “AHV 21” / “AVS 21”.

The financing of the OASI has been deteriorating noticeably since 2014 and it has become apparent that the funds paid into the Swiss Old Age Insurance are no longer sufficient to finance current annuities. However, the pay-as-you-go system requires a balance between revenues and expenditures. This situation will worsen further with the baby boomers retiring from 2020. The accumulated pay-as-you-go deficit between 2022 and 2030 is equivalent to 39 billion Swiss francs, with the financing requirement to cover one hundred percent of the equalization fund amounting to 53 billion Swiss francs.

In the past, several attempts have been made to reform the Swiss pension system, but none of the presented measures could be implemented. Due to the urgency, the Swiss Parliament has now drafted adjustments to the law (AHV 21 / AVS 21) that cover only the most essential points to stabilize the Swiss pension system.

The most important measures the reform provides are the following:

• standardized retirement age of 65 for both men and women
• compensatory measures for the transitional generation
• more flexible option on the retirement age 
• incentives for continuing to work after the age of 65.

According to the Swiss Parliament the above measures alone do not cover the full deficit calculated for the period between 2022–2030, therefore an increase of the VAT rates is envisaged which should help to cover the open deficit:

As the VAT rates are fixed by the Federal Constitution, the increase of the VAT rates is subject to a mandatory referendum. Since all the measures are interlinked, they only come into force if all measures are approved. E.g. this means the retirement age for women will only be set at 65 if the VAT rate will be increased and vice versa.

The Swiss people will have to vote and decide whether they agree with all the changes the Swiss parliament presents concerning the Swiss pension system and the increase of the VAT rates. 

The referendum deadline is 7 April 2022. The vote will have to happen within one year after this deadline. The potential increase of the VAT rates would be implemented in 2023 at the earliest.

At first glance, the answer seems to be straightforward. However, in practice VAT rates can be increased either linearly or proportionally. In a linear increase, each of the three rates is increased by the same number of percentage points while in a proportional increase the ratio between the standard rate and the preferential rates are maintained. In terms of tax revenues, the linear method would raise about 12 percent more revenue than the proportional method. On the other side, from a social policy perspective, the proportional increase has the advantage of mitigating the regressive effect of VAT. With this method, the lower rates are less affected, and the consumption of everyday goods is thus less burdened. Thus, the proportional increase in VAT offers the advantage that the purchasing power of low to middle incomes is not significantly affected. 

In Switzerland the previous VAT rate were based on the proportional method. Therefore, for the VAT rate increase, the current bill also provides for a proportional increase. 

A VAT rate change itself is not unique to Switzerland; it can happen anytime in any other jurisdiction. However, letting the public decide in a public vote is still unique.

Recently, there has been a dramatic cultural shift as governments and communities increase their focus on social and health issues, environmental concerns, sustainability and corporate governance. 

They want businesses to operate responsibly. How well you can demonstrate your commitment and contribution, to meeting ESG (environmental, social and governance) and sustainability goals, is becoming a clear measure of such success – and tax transparency is increasingly seen as both an essential element of ESG disclosure and a key metric when demonstrating your responsible attitude towards taxes. 

While ESG reporting itself does not have to do much with taxes, the point is that governments want taxes to help fund ESG initiatives (like having VAT revenues partially cover the Swiss Old Age Insurance) and the public wants to be able to see that organizations are doing the ‘right thing’. Everyone has a vested interest: sustainability, social justice and avoiding the negative effects of climate change. Tax and tax transparency play a central part in all discussions on these issues. This means that tax functions should be involved in ESG and sustainability discussions. This way everyone helps, everyone wins.

The reasons for a VAT rate change (either economic, social or governmental) can vary from case to case and also from country to country. Some governments decided to shift their revenue sources from direct tax towards indirect tax, some countries recently voted to implement a temporary VAT cut regime to cushion the negative impact of COVID-19 and an entire region (GCC) decided to implement and introduce value added tax for the first time in the last years.

It is clear that this VAT rate change does not require immediate action by the companies operating on the Swiss market. However, based on this development, it is (again) a good time to re-think ERP strategies and the way how indirect tax law changes (VAT rate and others) are managed. In this respect please read our previous blogs as well where we reviewed the ERP considerations of a VAT rate change and indirect tax operating model.

KPMG will follow the development of the topic and communicate the result of the voting. In the meantime if you have any questions around ERP strategies from an indirect tax perspective please contact us.