About a month ago, the Israeli High Court of Justice deliberated a case petitioning the court to order the Minister of Finance and the Director of the Israeli Tax Authority to impose value added tax on multinational companies, such as Google and Facebook, arguing that they are providing services and selling goods in Israel via the internet, without being required to pay VAT, which gives them an unfair advantage over Israeli competitors.

The petitioner pleaded that the multinational corporations are conducting extensive business activities in Israel, which include, inter alia, marketing and communications in Hebrew with Israeli customers and payment in Israeli currency. The petitioner also argued against the “location of the server” criteria that the Israeli Tax Authority is using in order to ascertain whether a transaction via the internet is executed in Israel.  

The court dismissed the petition and stated that it is premature, given that the VAT authorities are drafting a circular on the said subject, which is expected to be released soon. The dismissal of the petition does not conclude one way or the other the issue of VAT liability, as this issue will surely be the subject of legal proceedings in the future.

Nevertheless, the question of tax liability is only one aspect of internet activities. There are many issues, including slander, consumer protection, gambling, forex, pharmaceuticals, protection of privacy and copyrights, which are arising in relation to internet activity. In relation to all of these, the fundamental question is which legal system will determine whether any given action is legal or not. Of course, these issues are not unique to Israel, and significant progress has been made, and some judicial rulings on these questions have already been issued, in various countries.