Will foreign web companies active in Israel pay VAT?

An attorney representing Israeli companies recently applied to the Israeli Tax Authority, to have the Value Added Tax Law enforced on foreign companies operating in Israel in the field of web advertising, such as Facebook and Google. In his application, Advocate Guy Ophir alleges that the Tax Authority unlawfully exempts foreign companies from their obligation to pay VAT with resepct to transactions they conduct with their Israeli customers. Advocate Ophir alleges that the Tax Authority does so by relying upon an outdated legal test that the Court has already vacated, according to which VAT obligations apply to Internet companies only if their web servers are located in Israel.

Advocate Ophir warns that he will petition the High Court of Justice if the Tax Authority does not address his application. He emphasizes that the VAT exemption gives foreign companies an unjust taxation advantage in relation to competing companies operating from within Israel, and causes the State an annual loss of tax revenue which he estimates to be in the hundreds of millions of NIS. 

The Tax Authority clarified in response, that it does not exclusively examine the server's location, but rather evaluates a multitude of criteria that examine the most significant contacts and the location of business activities of foreign companies providing services to Israelis over the web. Source:
Globes (in Hebrew, by Ela Levi-Weinrib)