Israel is joining a growing number of countries that levy VAT or goods and services tax on digital services supplied from outside the country to domestic consumers. Proposed legislation that is proceeding through the Israeli parliament would require nonresident providers of online services to Israeli private customers to register for VAT purposes and collect and remit a 17% VAT to the Israeli tax authorities.
It should be noted, under current Israeli legislation, nonresident providers of digital services that have an "Israeli economic presence," as defined in a 2016 circular released by the tax authorities, must register in Israel for VAT purposes, appoint a fiscal representative in the country and submit periodic VAT returns (as a foreign taxable person in Israel). The circular defines an economic presence in Israel as one where the nonresident has a significant number of Israeli customers, a website tailored to the Israeli market and in Hebrew, allows for Israeli methods of payment, has advertisements for Israeli customers, etc.
The proposal would expand the applicability of VAT on services provided by foreign suppliers to Israeli consumers. It should be noted that the VAT registration requirement under the tax circular is a normal registration that allows an input VAT deduction, unlike the proposed measures, as detailed below.
Based on the current wording of the proposed legislation, it appears that the 17% VAT rate would be calculated on top of the amount charged for the supply to the extent there is no indication that such amounts are VAT-inclusive.
The proposed legislation defines various terms as follows:
The legislation contains rules to determine a customer’s location. For this purpose, an Israeli resident is a “person who is identified by an online operator as receiving a digital service from Israel based on the individual’s place of residence, the means of payment and any stationary infrastructure or equipment through which the consumer received the services.”
The statute of limitations would be seven years for taxpayers that submit reports to the Israeli tax authorities; presumably there would not be any limitation period for taxpayers that do not submit reports.
The proposed legislation does not specify any threshold for registration, but rules setting out the specifics of registration and periodic reporting requirements are expected to be published in the near future.
As currently drafted, it appears that the proposed VAT registration would be for the reporting of output VAT, so nonresident suppliers of digital services would be prohibited from claiming a deduction for input tax, i.e., these suppliers would not be able to claim input tax as a credit against their output tax liability. This is problematic because Israeli service providers making supplies to nonresident digital service providers would have to charge Israeli VAT since the fact that nonresident service providers must register for VAT purposes precludes them from being regarded as nonresidents (according to the current draft of the bill). This means that supplies made to them by Israeli service providers would not qualify for zero rating. The situation is further compounded because nonresidents are not entitled to refunds of Israeli VAT.
It is not clear when the legislative process will be completed, but it seems likely that will be soon, with the new rules becoming effective as from the date the legislation is officially published.
Ayelet Yitzhaki
ayelety@bdo.co.il