20 March 2014
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Global Tax Alert
Israeli High Court of Justice
rejects petition to deny
”foreign resident” VAT
status from multinational
internet companies
Executive summary
On 11 March 2014, the Israeli High Court of Justice (HCJ) rejected a petition by an
advocate, who asked the HCJ to order the Minister of Finance and the Israeli Tax
Authority (ITA) to impose value-added tax (VAT) on cross-border digital delivery
of services and products, made by foreign multinationals in the Israeli market. In
its ruling, Guy Ofir vs. The Minister of Finance and others (HCJ 6845/13), the HCJ
rejected the petition on the ground that it was submitted too early, while the ITA is
still working on a tax circular which will be published soon, concerning the taxation
of digital economic activities in Israel.
Detailed discussion
The petitioner’s position
The petitioner asked the HCJ to order the ITA to treat multinational internet
companies which operate in the Israeli market in the same way the ITA treats Israeli
interment companies.
The Petitioner argued that the digital activities carried out by the foreign
multinational internet companies in Israel give rise to VAT liability which is not
collected or enforced by the ITA. In particular, the petitioner argued, that the
services and goods sold by the foreign multinationals are customized for the local
language and currency in Israel; the foreign internet companies conduct marketing
activities which are addressed to Israeli customers; and that the companies
registered dozens of trademarks to protect their business in Israel. Based on the
petition, the ITA does not impose VAT on those
transactions because the ITA considers the location of
the internet server as a key factor in determining the
place of taxation (for VAT purposes). The Petitioner
raised arguments to support his approach that this
factor lost its relevance and therefore leads to wrong
results in the current digital economy environment.
The HCJ Decision
As noted, the HCJ rejected the petition as it was
submitted prior to the publication of the tax circular
on this matter. The HCJ did not rule on the substantial
tax matters and did not provide guidance regarding the
appropriate interpretation of the VAT law in the context
of digital economy activities in Israel.
Based on the petition, failure to collect VAT from
those multinationals entitle those foreign companies
to favorable conditions in comparison to their Israeli
competitors (because certain customers have no right
to deduct/refund the VAT charged on the transactions
that they conclude with the Israeli internet companies).
Implications
The ITA’s response
The respondents argued that the place of taxation
may be a complex matter in the context of foreign
internet companies that are doing business in Israel.
The conclusion regarding the place of taxation should
be examined from a wider perspective and not just
based on the language of the Israeli VAT law. The
respondents highlighted the fact that the OECD
publication regarding base erosion and profit shifting
(BEPS) covers this area and that the ITA will publish
soon a professional circular which will provide guidance
on this matter.
The petition’s overview of the VAT environment in
the area of digital economy activities does not reflect
some recent developments regarding this matter
(although the aforementioned tax circular has not
yet published by the ITA). In recent instances, the
ITA took an aggressive approach as to the place of
taxation of digital activities carried out by foreign
internet companies. In some cases the foreign internet
companies ceased to be treated as “foreign residents”
for Israeli VAT purposes. As a result, those foreign
companies were required to register for VAT in Israel
and to charge VAT to customers.
Accordingly, internet companies doing business in
Israel should assess the potential impact of the recent
VAT developments on their business and verify their
VAT compliance in Israel.
For additional information with respect to this Alert, please contact the following:
2
Kost Forer Gabbay & Kasierer, Tel Aviv
• Regev Itzhaki
+972 3 563 9801 regev.itzhaki@il.ey.com
Ernst & Young LLP, Israeli Tax Desk, New York
• Ram Gargir
+1 212 773 1984 ram.gargir@ey.com
Global Tax Alert
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