The standard rate of value-added tax (VAT) in Israel is expected to go up from 17 percent to 18% shortly, perhaps on June 1. This is according to reported proposals and is not yet final. Nevertheless, it is best to prepare as the finalization of VAT rate changes is usually fast. Below we consider how to prepare on the assumption that the proposed VAT rate increase indeed takes place.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 agreed otherwise.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 one 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 expected VAT rate change.Real estate When renting out real estate, the date of VAT liability is determined on a cash basis. If rent is actually received before the VAT rate change, 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.• 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 a point before the rate change may escape the VAT increase on that payment. This also applies if they took early possession before the rate payment. However, when selling secondhand 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 paid for building services before the rate change will be entitled to pay VAT at the old 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 deliver possession of the land to the builder before the rate change, 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 the rate change. If delivery takes place in stages, the VAT liability arises when each part is sold.For manufacturers with no more than six employees and annual revenues no more than NIS 1,950,000, the VAT liability on assets sold arises when consideration is received on the amount received.In the case of consignment deals, if not more than 10 percent 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 consideration is received on the amount received. If amounts are paid on account, the VAT liability applies to each payment.If the parties are related, or if the service is given by a business whose revenues exceed NIS 15 million in the year concerned, the liability generally arises when the service is given.If the service is given in stages, each stage is liable to VAT. If the service is indivisible, VAT arises when each payment is made or upon completion of the service, whichever is earlier.As always, consult experienced tax advisers in each country at an early stage in specific cases.
