Tourists in Israel to Receive Greater VAT Refund Upon Leaving

Class action suit forced Tax Authority to change its policy, regulate processing fee and lower minimum purchase eligible for a tax refund to $35

Tourists at Ben-Gurion International Airport, February 27, 2019.
Ofer Vaknin

Tourists visiting Israel can now get back more in VAT when they leave the country, thanks to a class-action suit filed by an American man who visited Israel last year.

Sean Feierberg petitioned the Jerusalem District Court to approve his suit as a class action in July 2018. In response, the Tax Authority changed how it processes tax refunds for tourists.

The new regulations, which took effect as of January 2019, lower the purchase sum eligible for a tax refund to 125 shekels ($35), down from 400 shekels, and also regulate the fee that tourists pay at the airport in exchange for their rebate.

However, the Tax Authority did not publicize the change anywhere, and news of it has yet to be published.

Israel, like many countries, offers VAT refunds to tourists as they leave the country, so long as they take the goods they purchased with them. Any tourist leaving Israel who wants a VAT refund pays the processing company that represents the government, Milgam, a fee equal to 1.99% of the tax refund, or 30.99 shekels if they want the refund issued as a bank transfer.

There are several restrictions: The purchase needs to be at a business recognized by the Tax Authority and the Tourism Ministry as eligible for a VAT refund – generally, this means a sticker appears in the window stating such. The tourist needs to receive both a receipt and special form enabling a VAT refund from the business, both of which are presented to the Milgam clerk at the airport. In addition, the goods need to be for the tourist’s personal use, and not of a commercial quantity.

Over the past few years, tourists to Israel have received VAT refunds totaling 90 million to 100 million shekels a year. The largest sums were returned to tourists from China, the United States, Russia, France and the Philippines.

Feierberg visited Israel in May 2019. In his suit, he claimed that the Tax Authority was collecting money illicitly.

During his visit, Feierberg spent 179.90 shekels on clothes at Castro, including VAT, and another 519 shekels on clothes at Story, also including VAT. When he requested a VAT refund form from Castro, he was told that he could not have one as his purchase was under 400 shekels. Story gave him such a form.

At the airport, Feierberg went to Milgam to receive his VAT refund based on his purchase at Story. He asked for the refund in cash, and expected to pay a fee of only 1.50 shekels – meaning he should have received 73.90 shekels back. Yet Milgam gave him only 62.61 shekels, after charging him a “fee for form processing.”

In his class-action petition, Feierberg argued that it was the Tax Authority that instructed Milgam to charge the additional fee, contrary to the law. The fee was set as a percentage of the total purchase – it was 15% for purchases of 400-600 shekels, and 13.5% for purchases of 601-1,000 shekels. However, Milgam did not keep this money. It transferred it to the Tax Authority, which used it to cover the fee that it paid Milgam for processing forms. Under the government’s contract with Milgam, it pays the company 17.60 shekels for each rebate form a tourist submits.

Feierberg also argued that setting a 400-shekel limit was against the law, as the law states that tourists are eligible to pay no VAT at all, with no minimum purchase.

The law permits the Tax Authority to escape class-action suits by informing the government that it will change the policies in question, and that’s what the Tax Authority did in this case: It told the court that it was changing its policies regarding VAT refunds.

Following Feierberg’s petition, the Tax Authority found that due to its percentage-based fee scale, it was overcharging fees from tourists who made purchases of 900 shekels or more – the percentage-based processing fees exceeded the 17.60 shekel fee it was charged by Milgam. Thus, the state overcharged tourists some 8.4 million shekels in fees between July 2016 and July 2018; on the other hand, tourists who made purchases of between 400 shekels and 900 shekels were undercharged by some 1.4 million shekels during that period. The difference works out to an extra 7 million shekels that the Tax Authority illicitly collected.

Thus, the Tax Authority decided to set a uniform 17.60 shekel processing fee for everyone. The minimum sum eligible for a refund was set accordingly – 17.60 shekels is the amount of VAT that would be returned on a 125-shekel purchase.

Since the suit was rejected on the grounds that the Tax Authority changed its policy, Feierberg and his legal team have received no compensation. However, the law permits them to file for compensation for expenses, as the outcome of the case improves the public good. Feierberg and his lawyers are waiting for the court to rule on their petition for compensation; they’re asking for up to 1.5 million shekels, a sum that the state objects to.

The Tax Authority stated in response that it changed its policy in response to the class-action petition, and that the change took effect as of the end of January.