Israel's Ministry of Finance has included plans to extend the country's VAT system to foreign suppliers of digital services as well as the potential introduction of VAT rules for the sale of low value goods via online marketplaces. It is still unclear what the actual effective date for the new VAT rules will be, but January 1, 2022, is predicted to be the earliest possible date.
The draft proposals are contained in a Memorandum called ‘The Law of Economic Efficiency (Legislative Amendments to Achieve the Budget Targets for the Budget Years 2021 and 2022)’.
The Israeli authorities expect the new VAT rules to raise circa USD110 million in 2022, the first year of the rules, and an additional USD115 million in 2023.
Israel VAT on digital services
Foreign digital service suppliers that come within the scope of these new VAT rules will have to register with the Israeli Tax Authority (ITA).
The digital services in the scope of the new Israel VAT rules include (list not exhaustive):
- Webcasts and remote learning
- Books, music, gambling, games, TV shows, and movies available online
- The supply of software
- Sales of intangible goods and digital products
- Online services enabling online activity, e.g., brokerage services between a buyer and a service provider
- Communication services include, among others, telephony, fax, Internet access services and other similar services
The Memorandum states the motivation behind the introduction of the rules (echoing a familiar global theme):
"Collecting the tax that applies to these services and goods is essential, both for the purpose of enforcing the payment of real tax and increasing state revenues from taxes, and for the purpose of preventing discrimination against Israeli businesses that provide similar services and goods to their customers, under a full tax burden."
Israel VAT on low value goods
In a move that mirrors other global tax changes, the Memorandum also indicates that VAT will be applied to the sale via online marketplaces of low value goods by non-Israeli businesses. Such businesses will have to register for Israel VAT as well as collect and report the VAT collected on these online sales.
There is no information on the threshold level to be applied for the online sale of low value goods. Similar rules are already in place in the European Union (EU) since July 1, 2021, in addition to rules in Norway, Australia, New Zealand, and (since January 1, 2021) the United Kingdom (UK).
The relevant thresholds in these jurisdictions are as follows: Norway (NOK 3,000, circa EUR270), Australia (AUD1,000, circa EUR605), New Zealand (NZD1,000, circa EUR560) and the UK (GBP135, circa EUR150). The EU rules followed the recommendation contained in the OECD report on the role of digital platforms on collection of VAT published in 2019. A key point in section 2.1 of this OECD report states that:
"A coherent implementation of liability regimes for digital platforms across jurisdictions is likely to enhance the levels of compliance while lowering compliances costs and administrative burden and addressing issues of double or non-taxation. Consistency is also likely to support tax authorities’ enforcement capacity by facilitating international administrative co-operation."
Israel VAT on digital services background
ITA circular indicating such a VAT rule change, it states that "a foreign corporation that maintains significant business activity in Israel is obliged to register for VAT as an authorized dealer and its transactions liable to VAT."
In September 2018,the ITA issued a ruling (6369/18) allowing a streamlined procedure for B2B e-commerce supplies by foreign businesses to Israeli businesses. There had been no movement, however, in the intervening years on B2C supplies by foreign businesses to Israeli-based customers until the latest Budget 2021-22 proposals.
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