The standard rate of value-added tax in Israel went down from 16.5 percent to 16% on January 1, 2010. This rate also applies to Wage & Profit Tax imposed on financial institutions. In 2011, the rate will again decrease to 15.5%.
Businesses in Israel that are "authorized dealers" for VAT purposes pass VAT on to their customers. Now that the VAT rate has decreased, let's hope consumer prices decrease correspondingly. But will they?
Unfortunately, the Knesset only passed the amendment on December 30, 2009, leaving businesses just one day to prepare for the VAT rate reduction. Consequently, the Tax Authority on December 31, 2009 issued instructions what to do about transactions effected now in 2010 at the right rate and at the wrong rate. Let's briefly review the principles involved and how to correct errors.
Goods and services
In principle, upon a sale of goods, the VAT liability arises when the goods are delivered to the purchaser. So the new lower VAT rate applies if the goods are delivered in 2010. 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.
For example, if on December 10, 2009, you ordered a table and chairs costing NIS 6,000 plus VAT for your home and it was all delivered on January 10, 2010. VAT will generally apply at 16% on the entire price. If the table delivered is on December 15, 2009, the 16.5% VAT will apply to the price of the table. If everything was delivered on December 15, 2009, but payment was spread over 6 monthly instalments starting on December 10, 2009 and finishing on May 10, 2010, all payments will bear 16.5% VAT because everything was delivered in 2009.
In the case of services, in principle, 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 arises upon completion unless payment is made on account, in which case the VAT liability will arise on the payment when it is made.
According to the instructions issued by the Tax Authority, if a business bills goods or services in 2010 on a cash basis with 16.5% VAT instead of 16%, it is allowed to issue a single combined credit note and record it in its books, covering all the wrong invoices - unless a customer requests an individual credit note for the 0.5% rate difference.
The business should, of course, refund VAT overbilled to customers or credit them on the next transaction.
The business may then reduce VAT output due on the relevant VAT return. The above is only permissible up to February 28, 2010.
Businesses selling goods or services on a one-off basis must refund any VAT difference to customers upon demand. They should also issue an individual credit note and adjust their VAT return accordingly. So if you overpay VAT in 2010, ask for a refund.
If, for any reason, a business charges a client VAT at a rate of 16.5% instead of 16%, it must pay it all over that VAT to the Tax Authority, or else, issue a credit note for the difference.
If a business pays 16.5% VAT and receives a Tax Invoice for this, it may credit the VAT on its VAT return. If the business later receives a credit note for VAT overpaid, the business must amend its next VAT return accordingly.
Larger businesses (with sales revenues over NIS 4 million in 2009) are required to report every invoice online commencing with the January 2010 VAT return. However, they need not report the VAT rate adjustment credit notes for the period up to March 2010.
When renting out real estate, the date of VAT liability is determined on a cash basis. If rent was actually paid by December 31, 2009, the old rate applies even if rent is paid in advance. If rent is paid after then, the new rate applies. This applies to commercial rentals, as residential rentals remain exempt from VAT.
When buying/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 postponed a payment to 2010 may enjoy the VAT decrease on that payment, if they did not take possession in 2009.
For example, you buy a new home from a builder for NIS 1m. According to the agreement, payment of NIS 400,000 is due on July 1, 2009, NIS 500,000 is due on January 15, 2010, and NIS 100,000 is due upon handover of the home (expected October 1, 2010). VAT applies at 16.5% on the payment of NIS 400,000 in 2009 and at 16% on the remaining payments in 2010. And if handover and payments occur in 2011 - 15.5% VAT should apply to them.
When selling second-hand homes, private sellers not trading in real estate are not required to charge VAT.
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 pays in 2010 for building services completed after 2009 will be entitled to pay VAT at the new lower rate.
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 delivered possession of the land to the builder before 2010, the old higher VAT rate will apply. In practice, possession is usually only given once planning permission is obtained.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is an international tax specialist at Harris Consulting & tax Ltd, in association with Lion Orlitzky & Co, (Moore Stephens Israel).