Tax Authority can't make Google pay VAT in Israel

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The Tax Authority is granting an Israeli company's request for a VAT exemption on advertising space provided to Google.

A large communications group in Israel will not be assessed for VAT on advertising space and services provided to Google, the Israel Tax Authority notified the communications group last month, following an eight-year dispute over the group's VAT bill for its agreements with Google. The Tax Authority has retreated from its original position by notifying the communications group that it will be entitled to a VAT exemption on the services it provides to Google.

The Tax Authority was previously determined to impose VAT payment on the Israeli websites providing services and advertising space to international companies operating in Israel through the Internet (such as Google). In recent months, however, the Tax Authority's determination in this matter waned. Its position regarding the communications was in addition to its dispute with the Shabbat Square (Kikar Hashabbat) website, in which the Tax Authority notified the court that it would not levy VAT on Israeli websites for providing advertising space to foreign companies such as Google and Facebook.

Advertising space

In the case of the large communications group, only a few million shekels are at stake, but the cost of exempting Israeli dealers from VAT on their agreements with Google until the international companies start registering in Israel and paying VAT is believed to amount to tens of millions of shekels a year. The affair began in 2010 when a large communications group in Israel with communications sites and television stations filed a request for a tax decision about its activity involving international company Google. In its query to the Tax Authority, the group described how it operated as a supplier for Google and asked the Tax Authority to confirm that providing VAT would not be levied on the advertising space it provides to Google.

The communications group argued that Google did not pay VAT on transactions in Israel, and that the VAT was rolled over onto Israeli companies and dealers serving as its suppliers. In the dispute between the group and the Tax Authority, which continued for many years, the group alleged that because of the Tax Authority's position, the VAT imposed on international companies, including several million shekels levied on Google, was left for it to pay.

In March 2013, three and half years after the communications group filed its request, the Tax Authority responded that it was charging full VAT for the services that the group was providing to Google, because the international company was operating in Israel and did not fit the definition of a "foreign resident" under the VAT Law, which was the source of the VAT exemption for foreign residents. The Tax Authority ruled that this decision would be valid when it was taken and henceforth, "because our position expressed in this document constitutes a change in the previous policy."

In June 2014, the communications group responded to the Tax Authority through Shekel & Co. Law Offices senior partner Ofer Elboim that it did not accept the Tax Authority's position and intended to continue reports deals like the one described in its request as zero-VAT deals. The group reported zero-VAT deals with Google totaling NIS 18.5 million in 2010-2014; the full VAT on these deals amounted to NIS 3 million.

The dispute between Google and the communications group was previously mentioned in the State Comptroller's annual report from November 2016 as part of his criticism of the Tax Authority's poor functioning with respect to Internet activity by multinationals. The State Comptroller did not identify the companies involved in the dispute. In May 2017, "Globes" revealed that the companies involved were Google and one of Israel's leading communications concerns.

The Tax Authority later reversed its policy in the matter. While the State Comptroller was writing his criticism, the Tax Authority was changing its policy on levying VAT in activity involving multinationals operating on the Internet. In April 2016, subsequent to the publication of the State Comptroller's critical report, the Tax Authority published a final circular concerning the Internet activity of foreign companies in Israel.

In this framework, the Tax Authority also formulated a legal memorandum stating that foreign companies selling products online to customers in Israel would be obligated to register as dealers in Israel and pay VAT on their deals. As reported in "Globes," the Tax Authority also began an assessment of Facebook and Google's activity in Israel in order to formulate recommendations about whether they should be obliged to pay tax in Israel, even though both of them were incorporated in Ireland.

In its talks with the Tax Authority, the communications group argued that the result of the Tax Authority's stance was an absurd situation in which concerns not incorporated in Israel, such as Google and Facebook, pay no VAT, while their Israeli suppliers pay VAT on transactions with them and are unable to roll the VAT over, as they do in any other transaction.

A few months ago, it emerged that the Tax Authority had begun to retract its position after apparently realizing that the fact that it did not tax Google was having a harmful effect on its ability to levy VAT on the Israeli websites conducting transactions with the international company. In a similar dispute with the Shabbat Square website, the Tax Authority notified the Jerusalem District Court that it was unable to collect VAT from Israeli websites for advertising deals with foreign companies such as Google and Facebook.

Even then, however, after admitting in court the difficulty in collecting VAT from the Israeli websites while the international companies pay no VAT, the Tax Authority still did not take a similar stance towards the large communications group with which it had a similar dispute. Only last month, six months after having already expressed its taxation policy as of that time, the communications group suddenly received through its legal representative a letter notifying it, "your clients' objections have been accepted."

The Tax Authority said in response, "We emphasize that the Tax Authority is taking action for the purpose of taxing digital economic activity and registering the international companies in Israel in various ways and using all available means, including legislation, its professional circulars, and other actions that will not be listed here. Furthermore, the Tax Authority is acting according to the existing legal situation without making concessions to these international companies. The response applies to the general question of activity by international companies in Israel, not the specific matter mentioned in the newspaper story."

Published by Globes [online], Israel business news - www.globes-online.com - on May 10, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Google Photo: Shutterstock
Google Photo: Shutterstock
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