The Israel Tax Authority distributed a notice to sites that are involved in selling or shipping virtual products locally or from abroad that they are required to charge customers value-added sales tax (VAT).
The rules do not apply to physical products ordered online, which are, as per Israel’s trade agreement commitments, tax-free for the first US$75, with 17% VAT applying only to products valued at between US$75 and US$500. The proposal is that foreign companies will pay tax on the provision of electronic services, telecommunications services and radio and television broadcasts to Israeli residents.
The electronic services liable to tax will include the supply of software, entertainment products, e-books, music, betting, games, television programs, films, Internet broadcasts and distance learning services.
Telecommunications services include telephony, fax, Internet access, and other similar services. In a statement, the Tax Authority said that it was following a recommendation of the OECD, which is encouraging member countries to charge tax on digital purchases.
The notice was sent to a long list of e-tailers with whom Israelis do business on a regular basis. In order to save online retailers the hassle of filing tax documents, the Authority suggested that e-tailers charge their Israeli customers the 17% VAT charge, and then pay the tax once every three months in a lump sum.
Currently, the law is voluntary, but the Authority intends to make it permanent by getting the Knesset (Israeli Parliament) to legislate the payment requirement. If a law is passed, the Authority will be able to ban sites from doing business with Israelis, or sanction the Israeli credit card companies who are a part of the deal based on the use of credit cards. The Authority will also be able to track those credit card payments and place blocks on the bank accounts they are associated with until customers pay up.