The VAT, or Value Added Tax, is a major source of revenue for the Israeli government. In fact, the recently proposed budget contains a proposal to raise the standard rate of VAT (Value Added Tax) from 15.5% to 16.5%. Many people know that exports are zero-rated and automatically assume that zero-rate VAT also applies to export services. This is not always correct. For example, when Israeli professionals (such as lawyers, accountants, real estate agents, architects and others) bill their services to customers located outside Israel, should they add VAT to the invoiced price? The answer is often yes. Section 30(a)(5) of the VAT Law states that zero-rate VAT applies to a service rendered to a foreign resident, but with numerous exceptions. First, zero-rate VAT is not allowed where the subject of an agreement is providing a service to an Israeli resident in Israel, in addition to a foreign resident, or to a partnership in which most of the rights are held by Israeli resident partners or a company which is considered Israeli resident according to the Income Tax Ordinance. An earlier (weaker) version of this rule was upheld in the Kasuto case. In that instance, an Israeli insurance brokerage tried to charge 0% VAT on its commission billings to Lloyds of London, one of the largest re-insurers in the world. The Israeli courts ruled the brokerage's services also benefitted Israeli resident policy holders so standard rate VAT applied to commissions paid by Lloyds of London to the brokerage. Recently, the present version of the VAT law was upheld by the Israeli Supreme Court in the case of Video International Y.G. Publicity Ltd. vs. the Tel-Aviv VAT Director (Civil Appeal 8726-06). The case involved an Israeli company which represented a Russian concern and offered Israeli ad agencies advertising time on Russian TV channels which were "also" received in Israel. The Court ruled that the Israeli company's service billings to the Russian concern were liable to standard rate VAT as Israeli residents "also" benefitted from the services. Second, zero-rate VAT is not allowed if the service relates to an asset located in Israel (other than passenger boats or planes) unless the consideration for the service is part of the value of imported goods for Israeli customs purposes. For example, if an Israeli advertising agency bills a Chinese widget manufacturer $100,000 for advertising their widgets in Israel, and the customs value of the widgets imported into Israel is $100,000 higher than it would have been without the advertising, then import taxes may well be imposed on this customs value. To prevent possible double taxation, the advertiser can charge 0% VAT on his advertising billing to the Chinese widget manufacturer. Now, suppose the goods are supplied not by the Chinese but by a US widget manufacturer whose widgets are exempt from Israeli import taxes pursuant to the Israel-US Free Trade agreement? The advertiser can still charge 0% VAT on his advertising billing to the US widget manufacturer. Third, standard rate VAT applies to services billed to foreign residents relating to other foreign residents present in Israel. What about services in the opposite direction - rendered by foreign residents to Israeli residents? For example, a New York lawyer advises an Israeli resident client on a US legal matter. Few are aware that such services are in principle liable to standard rate VAT. In practice, such VAT is rarely collected by the Israeli Tax Authority and the rule is not enforced. But, to avoid potential exposure, should the New York lawyer (and other foreign service providers) register for Israeli VAT purposes and remit each month's VAT on their billings to Israeli residents? Generally not - the view of the Israeli Tax Authority is that it is sufficient for the Israeli resident customer to apply a "reverse charge" procedure - this means the customer bills himself with VAT and hands over the VAT to the ITA. If the customer is an Israeli VAT-registered business, it can recover the same VAT as part of the input VAT on its own purchases/expenditures within 6 months - after that the input VAT cannot be recovered. Unfortunately, the reverse charge procedure is rarely done in practice and again there is virtually no enforcement at present. In short - caveat emptor - let the Israeli resident service buyer beware, as well as foreign resident service suppliers. As always, consult experienced professional advisers in each country at an early stage in specific cases. email@example.com Leon Harris is an international tax specialist.