The Israeli Tax Authority hops to amend the VAT Law in such a way that would require nonresident suppliers of digital services to register and account for value added tax in Israel. So far, a draft bill has been submitted by the Israeli Tax Authority that signals the next development in taxation and that will obviously have a dramatic effect on the activities of various big companies such as Google, Facebook and Amazon.
Israel is not the first country to impose VAT on cross-border purchases. The initiative sponsored by the OECD was launched last year in response to what it said was growing concern from governments worldwide rising volume of sales on which no VAT is paid, and in particular on products bought via internet sales by consumers from vendors outside their home jurisdiction.
The Draft Bill
The Israeli Tax Authority draft bill is based, inter alia, on the OECD’s final report on BEPS, Addressing the Tax Challenges of the Digital Economy, Action 1. The draft bill is also considering the International VAT Guidelines, and the EU law in this context.
Under the Israeli Tax Authority draft bill, it is generally business-to-consumer supplies of digital services that would give rise to Israeli tax obligations on the part of nonresident suppliers.
Additionally, the Israeli Tax Authority draft bill applies to both nonresident suppliers themselves, and nonresident operators of online stores. Consequently, big companies selling virtual content or providing internet services to Israeli customers should assess the potential impact of the recent tax developments on their business and VAT compliance in Israel.
Israeli Tax Authority Circular
A draft circular was published by the Israeli Tax Authority on internet activity of foreign companies in Israel, on April 2015. Later, on 11 April 2016, the Israeli Tax Authority released their official circular on internet activity of foreign companies in Israel.
The circular by the Israeli Tax Authority focuses on instances in which income of a foreign company could be attributed to a Permanent Establishment in Israel in the context of the digital economy. The Israeli Tax Authority provides its view on implementation of the Permanent Establishment principles, distinguishing between foreign companies resident in a treaty country of Israel and companies resident in a non-treaty country.
According to an Israeli Tax Authority circular, foreign corporations providing internet services to Israeli consumers may, under certain circumstances, have VAT obligations in Israel, under the presumption that the internet services are part of an Israeli business activity. Normally, under the Israeli Tax Law, a foreign corporation is required to register for VAT and appoint an Israeli representative in case it carries on business in Israel. The recent draft law follows up on the Israeli Tax Authority policy presented in the circular.
Who will pay VAT?
The draft law applies to a digital service provided by a foreign resident to an Israeli resident who is not a business but a private consumer. Under such circumstances, the party liable to pay VAT would be the nonresident supplier of the online services which is an entity that was incorporated outside of Israel, and does not carry on business in Israel.
What is digital service?
Digital service is defined under the new proposed tax legislation as any of the following:
Telecommunication service – services with respect to information transported via lines, optic fibers, radio, and electromagnetic system, including various telecommunication services, such as Voice IP, fax, and internet access services.
Television or radio broadcast services
Electronic services – services, including sales of intangible goods, provided through the internet or other network, including software sales or upgrades, entertainment products, gaming, music, digital books, gambling, TV programs, movies, transfer of rights to sell intangible goods or services in an online store in exchange for consideration, and intermediating between buyers and service providers.
Registration with the Israeli Tax Authority
The registration process with the Israeli authority for nonresident suppliers of digital services would be different than for standard suppliers. Under the draft tax legislation, the special registration procedure would be determined by the Israeli Finance Minister.
To the extent that a foreign digital supplier is required to register with the Israeli authority, it will submit a periodic report to the Israeli VAT commissioner and pay the appropriate Israeli tax. The report will include the total transactions price for the period and the tax liability on such transactions.
The Israeli Tax Authority director will be entitled to issue a tax demand to the foreign resident if the report submitted turns out to be incorrect.
Under the amendment, the foreign resident is obliged to retain information on transactions for a period of at least 10 years in order to allow effective examination of the reporting. Furthermore, within the 10 year period, the VAT commissioner will have an authority to demand payment on account of tax deficiency within 30 days from giving a notice to the foreign resident.
Dr. Avi Nov Law Offices, Israeli & international tax law
*this article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion