Israel seeks introduction of a tax on digital sales

By‎ Adv. Henriette Fuchs

Head of Tax Group at Peal Cohen Zedek Latzer Baratz Tel-Aviv Office

This article is edited and published by the Internet, Cyber & Copyright Group at Pearl Cohen led by Haim Ravia
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Israel’s Finance Ministry and tax authority announced in the last week of April that they intend to bring a digital sales tax (DST) that may reap some ILS 1 billion ($280 million) for its treasury. The tax authorities will be working on the development of a tax on the sales of foreign digital companies in the Israeli marketplace. 

The authorities are considering a 3-5% DST, similar to the tax France recently put into effect. 

First movements 2014; tax on digital sales foreign businesses

In 2014, Israel’s High Court of Justice dismissed a private petition demanding that the tax authorities take measures to ensure that Israeli value added tax (VAT) be charged on supplies by foreign companies of which the business is typified as “digital”. 

The Court found the petition premature, in 2014, reasoning that indeed the new “digital world raises complex issues with wide tax implications that need to be addressed by the legislative powers". Israel’s tax authorities then promised they were going to issue a professional circular regarding the taxation of internet companies. 

Inventing a tax on digital sales; 2016

In a long-awaited circular Israel’s tax authorities explained the conditions that would qualify the connection of a foreign digital company to the Israel marketplace as a permanent establishment (PE), in April 2016 (4/2016). A foreign digital seller would also be held to register as a VAT dealer and charge and pay VAT (17%) on its supplies in Israel.  

The criteria in the circular took quite an aggressive approach that does not sit well with Israel’s commitments under most of its’ tax treaties, especially because even the OECD is still today mulling over the best approach to tax activities in the digital world (and whether there is a best approach at all). 

On top of its' incompatibilities with certain legal prescriptions, the circular also proclaimed that it could have effect on income generated in periods before the OECD's multilateral instrument (MLI) went into effect. 

Interestingly, not long after the publication of the 2016 circular, both the annual reports of the state comptroller and the national ombudsman raised questions as to the writing of pseudo-tax law by the tax authorities in the form of circulars, in lieu of amendment or expansion of the applicable rules by way of a proper legislative process. 

Continued evolution tax on digital sales in Israel

In January 2017, a proposed amendment to Israel’s Income Tax Ordinance actually positioned ‘transfer pricing (TP) principles’ as a proper foundation to tax digital foreign companies, thus abandoning the artificial search for a deemed PE. 

Early in 2018, eBay Marketplace Israel, eBay’s local Israeli subsidiary, admitted to having received tax assessments totaling ILS 156 million. These assessments were likely based on the view that eBay’s subsidiary was not merely an R&D service supplier, but also the longer arm of the commercial part of the eBay group in Israel.

Other large internet companies found themselves in discussion with the Israel tax authorities too. By issuing these assessments, the Tax and Antitrust Authority made good on their promise to the 2018 special session of the Knesset Economic Affairs Committee that tax and monopoly matters in relation to foreign international digital companies would be closely examined, and that action would be taken.
A separate additional proposal from 2016, seeking to levy VAT on transactions in Israel from business to consumer (‘B2C’) by foreign ‘digitals’, is yet to be advance by Israel’s ministry of finance.

A renewed proposal regarding the creation of the obligation to charge VAT on digital transactions may be tabled as well in the upcoming discussion regarding the development of  DST legislation, unless it is not the desire of the policymakers of Israel increase the cost of living for consumers. On the other hand, because services and goods of local companies are subject to VAT, should those from foreign-based providers then not bear VAT as well to undo a current competitive disadvantage experienced by domestic digital sellers.

The 2019 proposal to create and implement a DST would no longer look for solutions claiming a PE or by using TP rules, but would  simply place a turnover tax on sales by foreign digital sellers in the marketplace in Israel.

To be continued...