Value Added Tax (VAT) is here to stay because it brings in more revenue to the government than any other tax and it accounts for about 25 percent of government revenues.
Israel's tax revenues
According to the Central Bureau of Statistics, in 2007 we paid taxes totaling NIS 248 billion. Of this, NIS 63b. was VAT, well ahead of NIS 44b. in income tax on wages, NIS 8b. in income tax on the self-employed, NIS 38b. in National Insurance Institute payments (employer and employee), NIS 26b. in company tax, NIS 17b. in city taxes, NIS 11b. in fuel tax, NIS 15b. in import taxes, NIS 11b. in other deductions at source, NIS 5b. in levies and fines and NIS 10b. on various other taxes.
VAT fraud
The government thinks VAT revenues should be even higher. Much VAT is apparently lost due to businesses claiming input VAT on phoney purchase invoices against output VAT on their sales revenues .
This is also a big problem in the EU, where it is dealt with by: (a) requiring businesses to check that their customers are listed in an EU database; (b) requiring buyers in certain cases to pay VAT directly to their VAT authority instead of to the seller; and (c) vigorous prosecution of anyone caught up in a chain of transactions with 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 be adopted, but it requires a lot more work from the business sector and charities. The Economic Efficiency Law (the budget law) enacted on July 14 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 invoices issued to customers and purchase invoices: sequential invoice number; its "symbol" - to be determined by the VAT director; date, amount and tax thereon, registered number of the supplier or service provider; registered number of the purchaser; and customs-import document number where 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 business online by the VAT director by November 30 regarding each following year.
Commencement dates
When does all this begin? Initially, businesses with sales revenues in 2009 over NIS 4 million, which are required to keep double-entry accounts (under the bookkeeping rules in the tax regulations), must start the detailed online reporting commencing with the January 2010 VAT return.
Businesses that have sales revenues over NIS 1m. in 2010, or are required to keep double-entry accounts, must start the detailed online 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 be retained for five years after filing, or longer if inquiries are opened. The database will enable the VAT Authority to spot discrepancies in the VAT returns filed by sellers and business purchasers, respectively.
A decent accounting system already contains most of this information, but it remains to be seen what adaptations will be needed to submit it to the VAT Authority. At the end of the day, the VAT Authority will have backup copies of most of the books of every business in Israel - big brother just arrived?
Charities and financial institutions
To avoid a gaping hole in the new reporting network, charities and financial institutions that purchase goods or services will also need to file similar online returns for periods commencing July 1, 2010. For charities, this start date applies if they have 600 or more employees. The start date is postponed to January 1, 2011, if they have 300 employees or more. Others will need to do so commencing in 2012.
Joint VAT filers
Joint VAT return filers - partnerships and others - must file an annual online summary return of all their transactions, including transactions among themselves. The first such summary return must be filed in 2010 regarding transactions in 2009.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leonharr@gmail.com
Leon Harris is an international tax specialist.
