The Israeli High Court of Justice published a decision on 11 March 2014 concerning the application of the tax law to cross border digital delivery of services and products by foreign multinationals operating in the Israeli market such as Facebook and Google. The petition (HCJ case 6845/13) was against the Minister of Finance and the Director of the Israeli Tax Authority. The Israeli High Court rejected that Value Added Tax (VAT) should apply to these companies.
The Organization for Economic Cooperation and Development (OECD) has recently decided to recommend on various changes to the international taxation rules in an effort to stop multinationals avoiding taxes by using tax strategies, which sometimes resulting in zero liability. The Israeli Tax Authority is participating in the OECD effort but for the meantime has decided to develop new rules unilaterally.
The petitioners claimed that the Israeli Tax Authority failed to require those non-resident companies to charge and pay Israeli VAT with respect to transactions with resident customers. They based their claim, inter alia, on the fact that the foreign companies conducted marketing activities which are addressed to Israeli customers and that the companies registered some of their trademarks to protect their business in Israel.
The Israeli Tax Authority argued that they make appropriate assessments in order to establish the actual location of the business activities such as the location of the server of such non-resident companies. The Israeli Tax Authority concluded, therefore, that these internet companies are outside the scope of application of the Israeli VAT tax law.
The Israeli Tax Authority further stated that the OECD position regarding base erosion and profit shifting deals this area and that they will publish a professional circular which will provide guidance on this issue.
The Israeli High Court of Justice dismissed the petition saying it is premature and stating that in the digital world internet transactions can trigger complex issues which have broad tax implications that need to be addressed by the legislator and the Israeli Tax Authority. The Israeli High Court of Justice stated also that the Israeli Tax Authority is in the process of formulating a professional circular on the taxation of internet companies and transactions.
See also: Israel Case Law
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