Article:

ISRAEL GLOBAL TRADE IN GOODS - NEW AGE CHALLENGES

29 October 2017

Ayelet Yitzhaki , Partner, Indirect tax |

Indirect taxation is in the headlines in Israel and around the world. Developments in global trade range from closing borders and imposing restrictions on importation, to cancelation of the free movement of goods, to establishment of new free trade agreements, to reducing or abolishing import duties for goods imported from certain territories or for small consignments, and so on.

 

Among the considerations that must be weighed when deciding whether to allow relief or to impose indirect taxes is reduction of consumer prices and opening of global competition versus protection of domestic industry. There is constant tension between these factors. E-commerce also brings new challenges that must be taken into account, as overseas goods are increasingly accessible to everyone with minimal, or no, compliance burden (for example, no import license or other certification for the imported goods) and sometimes no indirect tax costs, creating unfair competition for the local suppliers. This article presents a short review of some of these trends and their potential influence on enterprises with global activity. The Trump government's protection of local industry is reflected in a variety of actions, including elimination of US participation in the Trans-Pacific Trade Agreement, reduction of corporate tax, and declaring the possibility of imposing a new 'border adjustment tax', which is similar to an import duty imposed only on imported goods. (The border adjustment tax has not been imposed at this point, but as

 

The Trump administration looks for ways to finance other tax reductions, it may bring the border adjustment back into consideration.) The US's recent imposition of heavy levies on importation to the US of Bombardier's aircrafts on the basis that Bombardier was the beneficiary of subsidies by

the UK and Canada demonstrates a trend that is bad news for exporters, especially those exporting to the US.

The UK's Brexit and separation from the European Union is expected to create customs borders between the UK and the EU, stopping the free movement of goods, services, and people to and from the EU. This will abolish existing free trade agreements between the UK and other countries that were settled with the EU rather than each one of its members separately. The challenges for the UK government are huge and there is uncertainty as to the new status in March 2019.

 

On the other hand, free trade is expanding in other places, for example there is a question of whether China will join the Trans-Pacific Trade Agreement. The EU and Japan are nearly ready to sign an agreement that will reduce trade barriers, reduce tariffs, and enhance trade between the countries. Such changes increase competition to local industries as well to industries of countries that previously enjoyed the privilege of free trade agreements that are being expanded to more countries.

 

Israel is also in the midst of signing a free trade agreement with South Korea that will cancel tariffs on imports of cars, electronics, and so on. As well, Israel is negotiating trade agreements with China, Vietnam, Ukraine, and Russia. This is good news for Israeli consumers because the tax reduction will reduce consumer prices, but it is not good news for local industry that will have increased competition.

 

In Israel there is a trend toward cancelling tariffs, for example, under the framework of the 'net family' reform, on importation of mobile devices and accessories, on baby clothes and footwear, and so on. However, the most substantial hit suffered by local industry comes from the VAT and customs exemption on the importation of goods worth up to USD 75 for VAT and customs, and the fact that the value of goods to be subject to exemption is expected to be increased by the government and the exemption is expected to be expanded. The exemption from VAT on the import of goods amounts to discrimination against local industry, which is liable to VAT on its sales, while foreign exporters who sell to the Israeli consumer over the Internet enjoy zero VAT on exports from their country and have no VAT liability in Israel. As a result, the Israeli consumer pays 17% less on goods purchased over the internet that are supplied by foreign exporters than they would otherwise pay on a local purchase.

 

The OECD's Recommendations

An exemption from VAT and customs duty on imported goods of low value was customary in Israel and worldwide. Prior to the technological development and the possibility of carrying out customs procedures online, the rationale for such exemptions was that the cost of handling import duties on low value goods would exceed the actual tax collected. This rationale is no longer valid. Indeed, in view of the exponential growth of online trading, the OECD report of 2015 recommends the abolition of VAT exemptions on importation of goods of low value. The report also suggests various ways of collecting tax effectively, especially on online transactions, and cancellation of exemptions on imported goods.

 

The OECD's recommendations are currently being implemented in various countries. Analysing your supply chain In light of the changing landscape, enterprises should assess the trends and analyse their supply chain to identify new risks and opportunities, rather than wait for local governments to find the balance between taking steps aimed at reducing prices for local consumers, opening their market to overseas competition, and protecting local industries.

 

BDO - INDIRECT TAX NEWS

OCTOBER 2017 ISSUE 3 WWW.BDO.GLOBAL

https://www.bdo.global/en-gb/insights/tax/indirect-tax/indirect-tax-news-issue-3-2017