Making e-commerce in Israel easier - opinion

The tax or lack thereof on e-commerce is a hot topic. Nobody quite knows where the Internet cloud is for tax purposes.

THE MOVE to online shopping isn’t going away, most experts agree. (photo credit: PIXABAY)
THE MOVE to online shopping isn’t going away, most experts agree.
(photo credit: PIXABAY)
 The Israeli Tax Authority (ITA) has renewed for three years an important general ruling, which allows a streamlined procedure for B2B (business to business) e-commerce supplies by foreign businesses to Israeli businesses (Ruling 6369/18).

Taxing the cloud

The tax or lack thereof on e-commerce is a hot topic. Nobody quite knows where the Internet cloud is for tax purposes. 
But earlier this year, the US Treasury Secretary in the Biden administration, Janet Yellen, accepted in principle OECD proposals for reforming international income tax relating to digital operations. Final OECD recommendations are expected in the next few months. 
And back in 20218, the US Supreme Court ruled in the Wayfair case that US states may in impose sales tax on out-of-state e-commerce. This applies not only to suppliers from other US states but also from other countries, such as Israel.
The EU has also tightened its taxation of digital supplies by suppliers located outside the EU. 
Both the US and EU also now seek to collect sales tax or VAT from online marketplaces. And a few countries are starting to impose digital services taxes – really a sales tax on top of VAT. 

Back to Israel

In Israel, the ITA issued a tough circular in 2016 about income tax and VAT on foreign suppliers with significant digital presence in Israel. The income side in practice is on held pending the OECD-Yellen recommendations. But the ITA decided to make things a bit easier for B2B supplies into Israel.

What’s in the Israeli VAT ruling?

The ruling refers to an Israeli resident private company which is registered as a dealer (osek) for Israeli VAT purposes.
This company purchases from related and unrelated foreign companies various services and intangible assets such as software licenses, R&D, various professional services, headquarter services (apparently management), hub services, legal services, communications, regulatory services and so forth.
Normally in B2B cases, the Israeli importer can apply a “reverse charge” mechanism and issue a self-invoice on behalf of the foreign supplier. The Israeli importer then pays the VAT thereon (17% standard rate) to the ITA pay can reclaim the same VAT as input VAT on this expense within six months.
However, the ruling makes it easier if there are multiple purchases by allowing a single combined monthly reverse charge self-invoice covering the consideration paid to all foreign suppliers that month.

Conditions for a single monthly combined self-invoice include

• The invoice must clearly state: “Combined Self-Invoice Per Relief from the Tax Authority and According to Ruling Number 6369/18”;
• Issued monthly;
• Included in VAT returns;
• Separate lines for: date, supplier’s name and address, amount paid including settlement fees where applicable, description;
• Proof of payment attached;
• Any changes in character or scope must be notified to the VAT Professional Department at the ITA.
The ruling is in effect for is in effect for a second term of three years until May, 2024.
The ruling reminds us that if any part of the foreign supplier’s activity takes place in Israel, it may have to register for Israeli VAT purposes and appoint a fiscal representative.
The ruling takes no position on whether the foreign supplier has a taxable permanent establishment for income tax purposes. This can be a big issue and specialist advice is recommended.
If the importer is NOT a dealer, it can  record a one-time transaction and pay the VAT to the ITA.

Comments

This ruling is an example of back-door law without the Knesset, but for once the ITA is to be commended.
But the ruling only works for B2B, business to business.
The ITA should know that the ruling does not work for B2C, business to consumers, which is where the main e-commerce VAT revenues are eluding them.
It remains to be seen whether foreign online portals serving Israeli consumers will feel compelled to collect Israeli VAT. Some are starting to do so, not all of them.
All in all, the ITA is not yet in the 21st century. It needs MOSS in English for foreign e-commerce suppliers to Israeli consumers if it wants more VAT revenues.

Rules for e-commerce firms

If you are an e-commerce supplier, check out your income tax and sales tax/VAT/GST liabilities in Israel and around the world.
Then work out how to comply efficiently – there are thousands of jurisdictions if you factor in US state and local taxes. And most important, figure out how to avoid double or even multiple taxes as the rules evolve. Answers exist, if you ask the right questions. 
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.