The State will collect VAT for online services offered by foreign companies

The Israeli Tax Authority at the Israeli Ministry of Finance has released a draft bill proposing amendments to the Israeli Value Added Tax (VAT) law such that foreign companies established abroad who provide internet-based services to Israeli customers will be required to pay VAT to the Israeli Tax Authority. The draft bill lists electronic services, communication services, radio and television services, as well as software, entertainment products, books, music, gambling, games, long distance education services and more.
The draft bill further suggests that a non-resident person or entity who provides digital services or operates an online store that offers digital services in Israel will be required to register with the Israeli Tax Authorities. The registration will not list the entity as a “Merchant” under the Israeli VAT law, but rather will be part of a separate designated registry to be determined by the Minister of Finance. The government estimates that the amendment will result in additional revenue amounting to tens of millions of shekels a year.
Two years ago, the Israeli Supreme Court dismissed a petition filed by Advocate Guy Ofir against the Israeli Minister of Finance and the Israeli Tax Authority, demanding that the authority collect tax from foreign companies operating in Israel through the Internet with respect to transactions they conduct with Israeli customers. In its judgement, the Court accepted the State’s position, which argued that the petition to the Supreme Court was premature because the “authorities entrusted with the enforcement of the VAT law are drafting a professional circular on this issue”. The Court ruled that the authorities should be allowed “a reasonable time to formulate their position on this issue”.
Until today, only companies with established active centers in Israel were required to report and pay VAT for their transactions. The new draft bill is expected to affect a wide range of Internet-based companies who previously were not required to pay taxes. These include hotel reservation sites, television services such as Netflix and others. The law will not, however, affect the taxation of goods (as opposed to services), which are governed by a separate taxation arrangement. The draft bill also notes that it is designed to prevent discrimination against Israeli businesses that provide to customers online services similar to those of foreign companies, as they currently carry the full VAT burden, while the foreign companies are exempted. Source: Calcalist (in Hebrew, by Omri Milman).