The state budget was approved in principle by the cabinet overnight on August 2. The budget still has to be turned into a draft bill and legislated by the Knesset by November 4, otherwise Israel may embark its fifth general election since April 2019. The budget contains a wide range of economic and fiscal proposed measures. Below we review some tax proposals.
VAT on online shopping
If your wardrobe and budget are both limited, one way of stretching your means is to go online and buy clothing and household items from well-known stores abroad. This usually avoids 17% Israeli VAT.
But not for long. One of the Israeli state budget proposals aims to collect that VAT, which may net the government around NIS 400 million per year.
The VAT proposal in more detail
The proposal is aimed at electronic services and low value goods.
A foreign resident supplier would become liable to VAT on a sale of digital services for the supply of electronic services, communication and TV and radio services to an Israeli resident that is not a business or charity.
A foreign resident operating an online store would become liable to VAT on a sale of low value tangible goods via such an online store to an Israeli resident that is not a business or charity.
Such foreign resident suppliers would be obliged to register at a specially dedicated VAT registry and detailed rules would be laid down.
Also, the foreign resident supplier would not be obliged to: (1) open an Israeli bank account, (2) have local representation in Israel or (3) incorporate an Israeli company.
Electronic services would “include, among other things:” the supply of software, entertainment products, literature, music, lotteries, games, TC programs, movies, Internet broadcasts and remote teaching services.
Communication services would “include, among other things:” telephone services, fax, internet access services “and additional similar services.”
Low value tangible goods would be goods not subject to import taxes other than VAT. Currently no import taxes apply to personal imports up to $75 and only VAT is applicable to personal imports worth $75-$500. The taxable value includes carriage costs. The proposal is transfer VAT collection duties to online stores where the goods value is up to $500.
An online store would include a website, software or service via the internet or an electronic network, supplying services through which tangible goods are sold by a foreign resident to an Israeli resident.
Comment
The proposal is based on OECD pronouncements addressing “base erosion and profit shifting” of 2015 and “International VAT/GST” guidelines of 2017.
The EU, and UK have issued similar rules over the years, and so have nearly all the US states in the realm of sales tax.
Disputed tax
When lodging a tax appeal at a district court, it is proposed that taxpayers should pay 30% of the tax in dispute if one of the following apply: (1) Sales over NIS 20 million in one of the years concerned or (2) tax in dispute over NIS 20 million.
Currently no tax in dispute has to be paid before the district court decides. The result is apparently unpaid income tax in dispute of NIS 20 billion and unpaid VAT of “NIS 628,000 approximately.” The government wants some of that tax now. No transitional rules for existing cases are mentioned.
Comment
Currently, the appeal process against a tax assessment is limited. First to different officials in the same tax office, then to the district court. This can take years and result in legal costs.
There is an alternative to the government’s proposal. What is missing in Israel is a tax tribunal system that would adjudicate tax cases in an expedited, cheaper, less formal manner, a little like arbitration. The US, UK and other countries all have a tax tribunal or tax court systems. Tax tribunals are needed in Israel to avoid frivolous claims by taxpayers and tax officials without going to the district court.
Real estate
Landlords of residential property who receive rent of under NIS 5,070 are currently exempt from income tax on such rent. It is proposed that they report this on tax returns filed online, if they don’t already.
Upon a sale of land, it is currently possible to obtain a partial exemption from land appreciation tax, according to a linear formula in the law. This exemption was only intended for residential property, so it is proposed to remove the exemption for land.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leon@h2cat.com
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.