Value Added Tax (VAT) is here to stay becauseit brings in more revenue to the government than any other tax and itaccounts for about 25 percent of government revenues.
Israel's tax revenues
According to the Central Bureau of Statistics, in 2007 we paidtaxes totaling NIS 248 billion. Of this, NIS 63b. was VAT, well aheadof NIS 44b. in income tax on wages, NIS 8b. in income tax on theself-employed, NIS 38b. in National Insurance Institute payments(employer and employee), NIS 26b. in company tax, NIS 17b. in citytaxes, NIS 11b. in fuel tax, NIS 15b. in import taxes, NIS 11b. inother deductions at source, NIS 5b. in levies and fines and NIS 10b. onvarious other taxes.
Thegovernment thinks VAT revenues should be even higher. Much VAT isapparently lost due to businesses claiming input VAT on phoney purchaseinvoices against output VAT on their sales revenues .
This is also a big problem in the EU, where it is dealt withby: (a) requiring businesses to check that their customers are listedin an EU database; (b) requiring buyers in certain cases to pay VATdirectly to their VAT authority instead of to the seller; and (c)vigorous prosecution of anyone caught up in a chain of transactionswith a fraudulent element unless they can prove their innocence.
Israel's hi-tech solution
In Israel, a hi-tech solution for VAT fraud is about to beadopted, but it requires a lot more work from the business sector andcharities. The Economic Efficiency Law (the budget law) enacted on July14 will shortly require longer periodic VAT returns (usually monthly),which list in detail the following:
1. Every tax invoice issuable in the period (to customers), even if the business is exempted from this requirement;
2. Every tax invoice issued in the period (to customers), even if the due date for doing so has not yet arrived;
3. Every customs-import document bearing the name of the business cleared in the period;
4. Every purchase invoice issued to the business in the period.
The following details will be required regarding tax invoicesissued to customers and purchase invoices: sequential invoice number;its "symbol" - to be determined by the VAT director; date, amount andtax thereon, registered number of the supplier or service provider;registered number of the purchaser; and customs-import document numberwhere applicable.
These returns will now be submitted online accompanied by an approved or secure electronic signature.
Invoice numbers to be issued will be allocated to each businessonline by the VAT director by November 30 regarding each followingyear.
When does all this begin? Initially, businesses with salesrevenues in 2009 over NIS 4 million, which are required to keepdouble-entry accounts (under the bookkeeping rules in the taxregulations), must start the detailed online reporting commencing withthe January 2010 VAT return.
Businesses that have sales revenues over NIS 1m. in 2010, orare required to keep double-entry accounts, must start the detailedonline reporting commencing with the January 2011 tax return.
Other businesses will need to do so commencing in 2012.
What it means
The VAT Authority will now have a database, and data may beretained for five years after filing, or longer if inquiries areopened. The database will enable the VAT Authority to spotdiscrepancies in the VAT returns filed by sellers and businesspurchasers, respectively.
A decent accounting system already contains most of thisinformation, but it remains to be seen what adaptations will be neededto submit it to the VAT Authority. At the end of the day, the VATAuthority will have backup copies of most of the books of everybusiness in Israel - big brother just arrived?
Charities and financial institutions
To avoid a gaping hole in the new reporting network, charitiesand financial institutions that purchase goods or services will alsoneed to file similar online returns for periods commencing July 1,2010. For charities, this start date applies if they have 600 or moreemployees. The start date is postponed to January 1, 2011, if they have300 employees or more. Others will need to do so commencing in 2012.
Joint VAT filers
Joint VAT return filers - partnerships and others - must file anannual online summary return of all their transactions, includingtransactions among themselves. The first such summary return must befiled in 2010 regarding transactions in 2009.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is an international tax specialist.