Israel Wants Amazon, Other Overseas Online Firms to Pay Taxes on Digital Products

New rules will require overseas business to register with the Israel Tax Authority and file tax reports.

Amazon sign.
Bloomberg

Overseas Internet companies who sell downloadable goods and services online in Israel, offer communications services or radio and television broadcasts, will be required to charge value-added tax, under draft legislation being prepared by the Finance Ministry and released yesterday.

VAT would also be imposed on downloaded apps, software, music, games, television programs and films, and online gambling.

Communications services liable for VAT would include online telephone and fax services, as well as Web access, the treasury said.

The new rules, for example, would require online retailer Amazon to charge VAT – which is now 17% – on virtual products like e-books, but not on actual books. Companies making reservations for hotels overseas, like Booking.com, would also have to charge VAT.

Israel isn’t alone is imposing VAT on cross-border purchases. An initiative sponsored by the Organization for Economic Co-operation and Development was launched last year in response to what it said was growing concern from governments worldwide over the ever-rising volume of sales on which no VAT is paid – particularly on products bought by consumers from vendors outside their home jurisdiction.

In 2014, business-to-consumer (or B2C) e-commerce sales were estimated to exceed $1.4 trillion – an increase of nearly 20% from 2013. The OECD said B2C sales were expected to reach $2.4 trillion by 2018.

Right now, when an Israeli consumer buys a downloadable product or service like a mobile app, the purchase is liable for VAT. But if the same product is ordered from, say, a company in Singapore, the Israeli buyer isn’t liable for Israeli VAT and the Singapore seller isn’t liable for Singaporean VAT. In fact, because no physical product passes through Israel’s ports or airports (where goods are checked by the customs authorities), Israel has no record of the sale at all.

The effective exemption creates unfair competition for Israeli companies selling in their home market and deprives the government of what sources say could be tens of millions of shekels in tax revenues every year.

“The digital economy and the sale of electronic services are services whose rapid growth and level of activity is growing from year to year, so that [tax] revenue is likely to grow significantly once the law is fully emplaced,” the treasury said in its statement yesterday.

The proposed law is now open to public comments until early next month.

Israel’s treasury said it would require overseas businesses that sell to Israelis online to be registered not as a business but in a special dedicated registry, and to file VAT reports with the Israel Tax Authority. The report would include prices for all products and services sold during the period and the VAT collected. However, the companies would not be required to present a full set of accounts, as domestic businesses must.

Until now, Israelis were liable for VAT but unlike in other sectors of the economy, the buyer was supposed to take responsibility for paying the VAT on goods and services bought online – even in the case of private individuals. In fact, very little VAT has been collected this way because of the obvious difficulties.

Under the new rules, the seller will be required to collect and pay the VAT, with collections becoming much broader and more systematic.

Physical products will remain subject to the same rates as before – a complete exemption for goods worth up to $75, and an exemption from VAT for customers on purchases up to $500.

Businesses, nonprofit organizations and financial institutions buying online services, however, will remain responsible for reporting and paying what VAT is due, the Finance Ministry said. An Israeli business selling digital products and services will be required to pay the tax, even if the origin of the service is overseas, it added.