Tax & Accounting Blog

The digital tax man comes to Israel

Blog, Indirect Tax, ONESOURCE, VAT Tax Rates, VAT-GST Management March 22, 2016

Israel’s Ministry of Finance is readying  changes to the VAT Act to impose VAT on the sale of downloaded items, broadcasting and communication services as well as other types of online services. This new legislation bring the digital tax man to Israel, joining countries like New Zealand, South Korea, South Africa, Japan and even Russia. Israel in October reduced the VAT from 18% to 17% because of a higher than expected tax receipts. However, a continuing budget deficit could be part of the drive to get extra revenue from this digital tax. VAT provides 25% of Israel’s tax revenue and the imposition of the tax on digital services would help to reduce the budget deficit and also create a levy playing field for local providers compared to multinationals.

This tax imposition has been called a “Netflix Tax” but each countries has different implementations of the tax requirement. In some cases, like in the case of the European Union the tax applies specifically to telecommunications, broadcasting and electronic services or TBE services. In contrast, Australia and New Zealand will plan to impose the tax on TBE services as provided through the digital economy, which could include the provision of accounting services or consulting services. This is much broader than just Netflix and can impact all aspects of the digital economy for a country’s residents, which can impact hotel reservations, tax preparation and legal advice. Along with companies who sell their own products, these tax impositions have a major impact on marketplace operators. Many countries believe the marketplace operators are in a better position to collect and remit the local indirect tax than the myriad of suppliers who sell digital goods and services in the marketplace.

The draft legislation in Israel will impose a similar requirement on global digital providers and will most likely require these companies to register and collect local VAT. In each country, there can be quirks to dealing with this tax and there is not a uniform implementation of the tax. In South Africa, a special classification called a foreign electronic services entity has been created on the VAT 101 registration. In New Zealand, the suppliers of digital services are not supposed to charge GST on the supplies to businesses as these businesses are not allowed to recover the GST.

This trend will continue with more and more tax agencies looking to collect taxes from global digital goods and services providers.