Bill imposes VAT on foreign cos selling online in Israel

Google Skype Facebook image: Bloomberg

The Israel Tax Authority seeks to collect tax from the likes of Google, Skype, Amazon and Facebook.

A year after the Israel Tax Authority published its revolutionary plan for taxing foreign Internet companies that conduct substantial business in Israel, a draft bill has been produced that signals the next development in taxation and that, if it passes, will have a dramatic effect on the activities of giant companies like Google, Facebook and Amazon and will ultimately, in all likelihood, make some of the products sold to Israelis via the Internet more expensive.

Under the provisions of the draft bill, foreign companies that sell goods or provide services via the Internet to customers in Israel will be obliged to register as entities carrying on a business in Israel and to pay VAT on transactions they perform. The draft states that a foreign resident who provides a digital service or operates an online store through which a digital service is provided will have to register as a business in Israel in a special register that will be maintained for the purpose, and will also be obliged to file a report with the Tax Authority attached to the tax payment that arises from it. The report will state the total price of transactions in the reporting period and the VAT due on them, and the Tax Authority director will be entitled to issue a tax demand to the foreign resident if the report submitted turns out to be incorrect.

The proposal is that foreign companies will pay tax on the provision of electronic services, telecommunications services and radio and television broadcasts to Israeli residents. The electronic services liable to tax will include the supply of software, entertainment products, e-books, music, betting, games, television programs, films, Internet broadcasts and distance learning services. Telecommunications services include telephony, fax, Internet access, and other similar services.

The draft bill further stipulates that if the service is provided to a business in the course of its business or to a non-profit organization or to a financial institution, the tax liability will fall on the receiver of the service, as it does today. An Israeli business providing services to an Israeli resident will be fully liable to tax even if the service is provided outside of Israel.

Dr. Ayal Shenhav, managing partner of Shenhav & Co. and an expert on international taxation and high tech, explains that the draft bill represents the continuation of a long process that has been taking place over recent years. "According to the basic principles of taxation law and tax treaties, a foreign resident is liable to pay tax in Israel only if he has a permanent establishment in Israel. A permanent establishment has to be a physical place in Israel, such as an office, a warehouse, or a factory, or a representative of the foreign resident. Therefore, a foreign resident who sells goods or provides services to Israelis via the Internet is not liable to tax in Israel, because he has no permanent establishment in Israel," Shenhav says.

"The outstanding examples are Google, which provides information and advertising services, Facebook, which provides advertising services, and Internet sites like Amazon that sell books and so on in Israel. In principle, when there is no permanent establishment in Israel, the foreign resident is also not obliged to collect VAT from Israeli residents. This of course creates inequality between an Israeli supplier, who collects VAT, and a foreign supplier, who does not, but that is how the VAT Law works, and the VAT is imposed on the supplier in his country of residence."

The question of taxation of foreign Internet companies has been discussed by the Tax Authority for some time, and it was also the subject of a petition to the High Court of Justice against the minister of finance, the director of the Tax Authority, Google and Facebook, on the grounds that the "exemption" from VAT for these giant companies should be abolished. In March 2014, the High Court of Justice dismissed the petition, because of the fact that Minister of Finance Moshe Kahlon and the Tax Authority declared that they were formulating new tax rules that would apply to these companies. A special Tax Authority committee discussed the issues involved and drafted a circular on the matter that was published in April last year and that forms the basis of the current draft bill.

The Tax Authority's proposals drew strong criticism, among other things on the grounds that the recommendations were far reaching and would scare away the global companies operating here, and that no other country in the world was applying such rules.

Meanwhile, around the world, new rules are in fact being formulated. "January 2016 saw sweeping change in Europe, particularly in the UK, which imposed VAT on digital services. The British say that if there are digital sales within the UK, then they will collect tax in the UK," Dr. Shenhav explains, "Google, for example, will reportedly start to pay substantial amounts of VAT in the UK. Israeli law is now trying to follow in the footsteps of the new legislation in Europe. The upshot will apparently be that VAT will be imposed on transactions by Israelis with foreign companies carried out on the Internet."

The Ministry of Finance and the Tax Authority see tens of millions of shekels in extra state revenue annually.

Dr. Shenhav explains how the tax on the activity of foreign Internet companies in Israel will be collected, if the bill passes. "The method proposed in the draft bill creates a mechanism whereby it will not be private individuals who will have to pay VAT but the foreign companies. Amazon, for example, will have to register and pay VAT. This is something new."

Technically, the foreign company bears the cost, but it can be assumed that in practice the cost will be passed on to the Israeli consumer. Dr. Shenhav: "Presumably this will add to the cost to Israelis of goods and services they buy from overseas. It could also be that some foreign residents will say that the Israeli market is too small for them to bother with the whole registration and reporting procedure for a market like this, and will stop selling to us."

Shenhav says that the draft bill raises many questions to which it does not provide answers. "What, for example, is digital activity? If you speak to a travel agent overseas and he sends you the details of your booking by e-mail, or if you make a booking directly on a website without speaking to an agent, on the face of it, it comes to the same thing, but there's a difference.

"Another thing you need to know is that in Europe, if you pay VAT in the UK, you can offset it in another country within Europe. We, however, are outside the European Union, so there is a real cost here that makes the service more expensive.

"Another question that arises is, how will the law be enforced? How will the Israel Tax Authority enforce a law against a company with no activity in Israel? Do you block its website? There is a great deal more to think about in connection with this bill."

Published by Globes [online], Israel business news - - on March 14, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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