taxes good 88.
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The standard rate of value-added tax in Israel goes up from 15.5 percent to 16.5% this Wednesday, according to an order issued by the finance minister last Monday.
Businesses in Israel that are "authorized dealers" for VAT purposes will generally pass on the increase to their customers. They are allowed to do so under Section 6 of the VAT Law, which says that if VAT is imposed at a higher rate than was previously agreed for a transaction, a business may demand payment of the additional tax from the purchaser unless otherwise agreed.
Consequently, the main effect of the higher VAT will be felt by "end consumers," which means private individuals, charities, financial institutions and companies that are not in business. An example of a company not in business is a company that invests in real estate for the long term, not as a trading activity.
Since real estate is probably the hardest hit, here are a few examples of what happens before and after the VAT rate change:
â€¢ When renting out real estate, the date of VAT liability is determined on a cash basis. If rent is actually received by June 30, the old rate applies even if rent is paid in advance. If rent is received after then, the new rate applies. This applies to commercial rentals, as residential rentals remain exempt from VAT.
â€¢ When selling Israeli real estate (or shares in a property company), the VAT liability arises when the real estate is placed at the disposal of the purchaser, or registration in his name, or whenever an amount is paid on account of the purchase price if earlier. Therefore, home buyers who brought forward a payment to June may escape the VAT increase on that payment. This also applies if they took early possession before July 1. However, when selling second-hand homes, private sellers not trading in real estate are not required to charge VAT.
â€¢ As for building services, the VAT liability arises upon completion of the work and placing the real estate at the disposal of the party who ordered the work, or upon making any payment on account. So anybody who paid for building services before July 1 will be entitled to pay VAT at the old rate.
â€¢ As for "combination" deals (barter deals, e.g. completed units in a new building in exchange for land), according to case law, if the land owners deliver possession of the land to the builder before July 1, the old VAT rate will apply. In practice, possession is usually only given once planning permission is obtained.
Goods and services
What about other cases not involving real estate? If goods are sold, the VAT liability arises when the goods are delivered to the purchaser. So the old VAT rate applies if the goods are delivered before July 1. If delivery takes place in stages, the VAT liability arises when each part is sold. In the case of consignment deals, if not more than 10% of the price is due to a supplier before an onward sale of the goods concerned, the VAT liability will generally arise upon the onward sale date.
In the case of services, the VAT liability arises when the service is rendered. If the service is rendered in parts, the VAT liability arises on each part. If the service is continuous and indivisible, the VAT liability arise upon completion unless payment is made on account, in which case the VAT liability will arise on the payment when it is made.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is an international tax specialist.
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