Israel’s Tax Authority on Thursday published draft guidelines for the taxation of foreign companies that are active in Israel over the Internet, Globes reported.
This means that giants like Google and Facebook will have to register as Israeli businesses and pay taxes on income from services they provide, such as advertising or website promotions.
According to the current legal situation, a foreign corporation’s revenues from services to Israeli residents is taxable if the services were rendered in Israel. However, Israel has signed double taxation treaties with several countries, ensuring that a foreign corporation will be taxed in Israel only if the extent of its activity makes it a “permanent establishment” there.
In light of the changes in the “traditional” economy, and the transition to a “digital” economy, the draft says, a company can now be considered a permanent establishment in Israel even when its activity is performed mainly via the Internet.
Likewise regarding the Value Added Tax (which is very steep in Israel: 18%), the same draft says that a foreign corporation with substantial business activities in Israel over the Internet will be required to register with the VAT division, and be expected to collect that pesky 18% on each transaction.
The issue of treating foreign Internet companies like Israeli businesses was the basis for a petition to Israel’s Supreme Court against the Minister of Finance and the Tax Authority, Moses Asher, alongside Google and Facebook.
The petition was filed by attorney Guy Ophir last October, claiming that “as far as the tax authority is concerned, all taxpayers are equal before the heavy tax burden, but some taxpayers are worth more, and so they are not required to pay VAT, and do not face criminal proceedings for aggressive tax planning, failure to report and consumer Fraud whereby their Israeli customer is led to believe that the VAT collected from them will be paid into the public coffers.”
In March 2014, the Supreme Court rejected the petition, on the grounds of statements made by the Minister of Finance and the Tax Authority that they were already working on designing new tax rules that will apply to those Internet behemoths.
Both the Minister of Finance and the Tax Authority told the court that the “Internet revolution” had created a constantly evolving reality, raising complex issues of international taxation, which must be addressed not only within the framework of Israel’s tax law, but that of foreign countries.
The new draft issued Thursday attempts to answer both the “everyone is equal but some are more equal” petition and the high court’s demand for rule changes.
Attorney Guy Ophir told Globes in response to the new draft: “Even though we still have to examine [the draft’s] actual application regarding VAT charges, this looks like a real revolution. If the draft is implemented, then Google, Facebook, YouTube, Amazon, Microsoft, and other corporations will be required to pay VAT. It could mean a contribution of enormous sums to the public coffers, at rates that could balance the national budget.”
Or raise the costs for Israeli clients dealing with those giants by, say, 18%, or discourage large Internet corporations from dealing with the Israeli market altogether—higher taxes have a way of generating unintended consequences.
But Ophir is not as interested in economic prosperity as he is in equality before the tax law, which is a valid concern.
He congratulated the tax authority, which, “albeit after a 20-year delay, ” executed “a shift in consciousness, ” getting rid of the archaic “server location test, ” which the courts have abolished back in 2004.
Ophir pointed out several problems with the Tax Authority’s draft, most poignantly the fact that it resorts to considering a corporation taxable in Israel if it employs an agent there.
“Google has a whole team of Israelis in Ireland, calling Israeli businesses and consumers from Ireland and closing big deals, often conducting no meetings in Israel. In the era of Skype and email, you don’t need to keep a physical ‘agent’ in Israel to conduct business in the country.”
In this context, Ophir noted that Google, for example, insists that “Google Israel” is not its agent in Israel, it merely provides it with technological services.
Does that mean, he asked, that “Google’s tax advisors will try to argue that Google doesn’t have an ‘agent’ in Israel, so the new draft’s provisions should not apply to Google?”