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25 October 2017

Ayelet Yitzhaki , Partner, Indirect tax |

Innovation in relation to VAT liability in Israel on foreign suppliers of electronic services via Internet, mobile telecommunications and broadcast

According to a bill initiated by the Israeli tax authorities, foreign companies who don’t have any presence or people in Israel, will be obliged to register for VAT purposes in Israel via a special registration (it is expected to be an online registration that does not requires Israeli fiscal representative) and will be liable to Israeli VAT for electronically supplied services, broadcasting and telecommunication supplied to Israeli consumers. 

According to that proposed legislation, the liability will apply on intermediaries such as app stores, as well. 
The above is generally based on the European model, which is increasingly gaining momentum in many other countries in the world as well, and is backed by the OECD guidelines; determine this is a right model of applying indirect taxation, by the "place of consumption" principle.

It should be noted that according to the proposal, a VAT registered client, non-profitable organization and a financial institution will be liable for the VAT on the services under discussion, themselves, (rather than the foreign supplier).

Comparing to the European model, it seems that the Israeli proposal's definitions are very wide and don’t refer to human intervention that may exclude its applicability.

Furthermore, it seems that under the current proposal the special periodical VAT report will include only output VAT and there is no deduction of input VAT (for the purchases from Israeli suppliers such as advertisers and marketing suppliers). In this context, it should be noted that Israeli law has no equivalent to VAT returns to foreign companies similar to existing mechanisms in the European Union (the 13th directive) and other countries. As far as no solution will be provided for the Israeli VAT paid to Israeli suppliers which may include Israeli related parties providing marketing, research and development services, technical support etc., double taxation may be created. We hope that until the final version of the new law will be enacted, that would be changed.

It should be noted that as a preparation for the new expected law, there are many practical elements that foreign companies will have to take into consideration, such as pricing to bring into account additional tax at a rate of 17% (otherwise the vendor will absorb it), an interface with the client that can identify and keep records such as place of residency of the consumer, whether it is an end consumer, business client, non-profit institution or a financial institution. It is not yet clarified what degree of evidence a foreign provider would have to keep and what validation of these data. It is also not clear yet whether the foreign supplier will be able to deliver the VAT to the tax authorities via a foreign bank account but it seems the registration will be an on line no need for local fiscal representative.

In summary, we expect that the Bill will go through changes before it is final, however politically it doesn’t seem to have many opponents and certainly will yield a significant increase in the treasury collection so our recommendations to those concerned to start preparation for the change.