Retailers in Israel Oppose Easing Tax on Overseas Online Shopping

Fear that raising exemption for personal imports would create uneven playing field, cost jobs

A worker gathers items for delivery at Amazon's distribution center in Phoenix, Arizona, November 22, 2013.
Ralf D. Freso / Reuters

Israelis have become such voracious online shoppers that the country’s brick-and-mortar retailers are starting to get nervous. Why? They’re worried that the government may make it even cheaper and easier by increasing the exemption on customs and value-added tax.

Online shopping has been growing at a 20% annual pace over the last five years, according to Paypal. It expects internet shopping will grow 18% in 2017 to about 14 billion shekels ($3.9 billion).

Most of the shopping is done at overseas sites like Amazon and Alibaba, where prices are often much lower than at stores at home. Personal imports are exempt from all taxes up to a value of $75. From $75 to $499, deliveries are exempt from customs but liable for VAT and the purchase tax.

Internet shopping

Israel’s threshold is low. In the United States, it’s $800, in Australia $761, in Russia $1,187 and on average across the Organization for Economic Cooperation and Development it’s $200 (all at current exchange rates).

Right now an interministerial committee, headed by Shira Greenberg of the Finance Ministry’s budget division, is examining how to make personal imports easier, by such measures as increasing the size of a delivery considered as personal imports and easing rules on imports of car parts and smartphones.

The committee has no mandate to increase the exemption, but it has discussed it and Finance Minister Moshe Kahlon – a big advocate of tax cuts – could authorize an increase like the one done in 2012 that raised the exemption to $75 from $50.

Consumer groups, overseas retailers and Israel’s postal service – which gets a lot of business from delivering online orders – all favor the move. But lots of businesses oppose it.

“Many groups have an interest in making sure that an increase in untaxed purchases doesn’t happen,” said Tamir Ben-Shahar of the market research firm Czamanski & Ben Shahar. “This group includes importers and manufacturers, retailers whose sales have been hurt by online buying, like apparel, electronics and cosmetics, and mall owners who don’t want to see sales of their tenants decline.”

Experience has shown them that a higher exemption will spur more online buying overseas. An official at the postal service, who asked not to be identified, recalls what happened the last time the exemption was boosted.

“Those $25 doubled purchases from 2.2 billion shekels in 2012 to 3.8 billion in 2013. In 2016 we’re had about the 10 billion level, and that’s the conservative estimate. In every country that they lowered the tax, shopping grew,” he said.

Retailers say they are already competing on an uneven playing field, where consumers are exempt from the taxes they have to pay.

“It’s unjust and unequal,” said an executive at one fashion retailer, who asked not to be named. “If the economy and finance ministers really want to lower the cost of living and benefit the citizens of Israeli, they need to lower duties and VAT across the board, not just for those who know how to shop online. Everyone knows it’s the wealthiest who shop online.”

He said a bigger exemption would strike a body blow against some segments, for instance apparel where internet purchases have reached 1.5 billion shekels, or 8% of the sector’s turnover. He warns that further increases in online buying would lead to layoffs in the retail industry, which today employs more than a million people.

The Israel Tax Authority also opposes increasing the threshold, although it insists it’s not because that will deprive it of taxes to collect.

“The main issue is the harm to businesses that pay taxes and have to complete with imports that are tax-free. That can hurt compliance with tax payments. Our concern is ensuring an equal tax burden,” a spokesman said.