Together is powerful

Yesterday (March 13, 2016) the Israeli Ministry of Finance opened a consultation process in respect of draft legislation aimed at amending the Israeli VAT legislation, introducing VAT liability on out of state e-commerce and digital services providers that provide electronic and digital products and services into Israel, even if such providers do not have any place of business in Israel.

The Ministry of Finance explained that the reason for such amendment is to level the playing field between out of state businesses that end up without being liable to VAT and local vendors that bear the full impact of VAT liability. Further, given that despite the theoretical VAT liability placed on the local Israeli residents that purchase such products and services, such VAT is not collected, the draft legislation suggests to impose the VAT liability on the out of state entities.

The core concept of the draft legislation is that where a foreign resident provides Digital Services to an Israeli resident (where such service is not provided in the course of the business of the Israeli resident, and where the Israeli resident is not a financial institution or a non for profit organization, as those terms are defined in the VAT Act), then the person liable to pay the VAT is the provider of the Digital Services or the operator of the online marketplace via which the Digital Services are provided.

For the purpose of this amendment, Digital Services are defined as Telecommunication Services, TV or radio broadcast, or the provision of an Electronic Service. Telecommunication Services are defined as a service provided in connection with the transfer or receipt of signals, words, sounds, photos or any other information, via any line, fiber optic, radio or any other electromagnetic system; these include, inter alia, landline or mobile telephone services, VoIP services and internet access services. The Provision of an Electronic Service is defined as providing a service, including the sale of intangible goods, via the internet, including, inter alia, software, books, music, gambling, games, TV shows, movies, online broadcasting and distance learning.

More than that, the definition of an Israeli resident, for the purpose of implementing the VAT liability, will include any person that is identified as an Israeli resident according to his/her place of residence, payment means used or the equipment through which he/she received the service. This places the burden on the providers of the Digital Services to analyze whether the person with whom they are contracting is an Israeli resident, on the basis of various facts and circumstances relating to such person.

But the draft legislation does not stop here – it also requires any person that provides Digital Services to an Israeli resident or any marketplace through which a Digital Service is provided to an Israeli resident, unless its annual turnover from transactions with Israeli residents is less than approximately NIS 100,000, to register and file reports with the Israeli tax authority, to pay the applicable VAT and to keep records of its transactions which are liable to VAT for a period of ten years, so as to allow the Israeli tax authority to inspect the reports filed. The Israeli tax authority is also granted with the power, where it suspects that the report filed is incomplete or inaccurate, to assess the missing VAT and require its payment.

There can be almost no doubt that this draft legislation is going too far with its intention to apply tax liability on out of state vendors and service providers, and level the playing field. While it is arguable whether a point of consumption VAT is the proper manner in which to impose VAT liability, the administrative and procedural burdens placed on foreign entities according to this draft legislation are excessive and unnecessary. The Israeli tax authority should have provided an efficient and easy manner in which the foreign e-commerce vendors and digital services providers could collect and pay the VAT liability, and this has not been done here. We believe that should this amendment enter into force, a substantial number of foreign e-commerce vendors and digital services providers will exit the Israeli market and refuse to allow Israeli residents to purchase their products and use their services. This will result in a far lower tax income than expected by the Ministry of Finance (tens of millions New Israeli Shekels), but more important than that – a major blow will be delivered to the internet industry in Israel, not to mention the provision of consumer facing online goods and services.

We urge the Ministry of Finance to re-consider the proposed legislation, and call on industry stakeholders to submit their responses as part of the public consultation process, which will end on April 4, 2016.