Israeli Retailers Challenge VAT Exemption for Online Purchases From Abroad

Coalition of business groups claims exemption unfairly discriminates against domestic retailing and manufacturing sectors

In this May 9, 2017, file photo, a package from Amazon Prime is loaded for delivery in New York.
Mark Lennihan/AP

Against the backdrop of the tough competition that Israeli retailers have been facing from online retailers abroad, a coalition of business groups filed a petition with the High Court of Justice on Monday challenging the exemption from value added tax on merchandise purchased online from overseas retailers and shipped to Israel. The exemption applies to orders of up to $75.

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The petitioners in the high court case – the Federation of Israeli Chambers of Commerce, the Israel Chamber of Independent Organizations and Businesses and the Association of Craft and Industry – claim that the exemption unfairly discriminates against about two million Israelis in the domestic retailing and manufacturing sectors. The local retail sector has seen a rise in store closures recently, and even foreign retailers in Israel are cutting back on their presence here. The retailers claim that one of the main reasons for their plight is the unequal competition that they face from online purchases (of up to $75) Israelis make from overseas websites that are exempt from the country’s 17% value added tax.

“The state is interfering with free competition and absurdly granting a clear competitive advantage to foreign businesses in competing for the hearts of Israeli customers,” the petition asserts, adding that Israelis’ internet purchases from abroad have been growing by nearly 25% a year and that the number of packages shipped to Israel from abroad has doubled over the past three years to 61 million last year. Under the circumstances, businesses overseas are gobbling up an increasing share of consumer sales in Israel, the petitioners claim.

About 12% of all clothing sales in Israel are from overseas websites; for some segments of the business, the figure is as high as 60%. “All of the experts and [government] authorities are in agreement that this rate will continue to increase and will double in the coming years,” the petition states. “Currently a considerable number of stores and [retail] chains are in danger of closing (or have closed), and entire segments face substantial difficulties in surviving.”

The VAT exemption was established in 2008 through an amendment to tax regulations but it was done indirectly, by stating that merchandise whose value was low enough to enter Israel duty-free would also come in free of value added tax. Retailers note that this means that any time the duty-free ceiling has been raised, the VAT exemption has also automatically increased, even though legislation providing duty-free treatment is separate and was enacted for various other reasons.

“It is therefore clear that changes in the duty exemption require a periodic examination as to whether the consequential expansion of the VAT exemption is in fact justified,” the petition says. “In the absence of such an examination, the result is the ‘tail wagging the dog.’ A duty exemption that is relatively modest leads to another exemption with much more far-reaching economic consequences and also runs counter to the purpose of the legislation from which it is derived,” the petitioners state, adding that “it is difficult to understand how the government of Israel is choosing to actually harm Israeli businesses.”

A number of retail experts believe that the difficult state of the Israeli retail sector is the result of consumers’ response to years of price gouging, which led Israelis to simply shift their shopping to internet retailers outside of the country, as well as making purchases on trips abroad. However, the petitioners claim that even from the consumers’ standpoint, there is no reason for the government to give preference to overseas retailers over domestic ones.

“Products in Israel are subject to Israeli oversight and regulation aimed at protecting the public’s health and safety,” reads the petition. “Israeli businesses are also subject to Israeli regulation in a range of fields, ensuring consumer rights, including Israeli consumer protection laws. There is no justification to provide an incentive, through deliberate tax discrimination, for Israeli consumers to actually choose products and businesses that are not subject to these legal provisions and while actually lowering the price [of the foreign goods].”