Amazon Web Services’ VAT Policy in Israel Sets Global Precedent

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By Matthew Kalman

Amazon Web Services’ decision to start collecting and remitting value-added tax in Israel through a local subsidiary could change the way multinational companies conduct business.

It could also eventually satisfy the Israel Tax Authority’s aim of collecting VAT and income tax from all foreign digital companies selling products and services in the country. Indeed, Amazon Web Service’s (AWS) decision is a signal it has accepted the tax authority’s position that multinational companies must charge VAT on services supplied abroad.

“The impact of this will be that all the multinationals see that Amazon did not ignore the Israeli approach that there is a VAT issue,” Oren Biran, a tax partner at Shenhav and Co. law firm in Tel Aviv, said May 17. “If Amazon did it, maybe others dealing in the same area will do the same.”

AWS generated nearly 10 percent of Inc.’s worldwide net sales of $177.9 billion in 2017. It provides cloud computing, storage, and data analytics for companies including thousands of Israeli customers from small tech startups to major corporations.

A spokesperson for AWS declined to comment.

New System

Starting July 1, AWS services will be sold to customers in Europe and the near east through its Luxembourg-based subsidiary Amazon Web Services EMEA SARL or a local country branch, Amazon announced in an email to customers May 14. AWS told Israeli customers they would be invoiced via the VAT-registered branch incorporated in Israel in June 2017. In compliance with Israeli regulations, invoices will be issued in shekels but customers will be able to pay either in shekels or the dollar equivalent.

“Beginning 1 July 2018, AWS accounts located in these countries and territories will receive their AWS bills, including VAT invoices, from AWS Europe. At the moment of invoicing, AWS will determine each account’s country, and thus the account’s AWS seller and applicable taxes,” the company announced on its website.

In 2016, the Israeli Tax Authority issued Circular 4/2016 on the digital economy in which it ruled that multinational companies, wherever they are physically located, should remit VAT where applicable on sales to Israeli customers and income tax on the profits from their Israeli business.

The authority’s position, which is line with European Union policy, means AWS customers already pay VAT on AWS invoices through a self-billing system which they can reclaim from input in their VAT returns.

“According to the law, a foreign corporation operating in Israel is required to register and report VAT. In the framework of measures taken by the tax authority toward the taxation of the digital economy, the authority is working, among other things, to register such corporations. The corporation, by registering itself as operating in Israel, is compliant with the policy that the authority is advancing,“ the tax authority said in an emailed statement May 16.

Impact On Customers

For AWS customers, the change July 1 is largely technical, transferring invoicing from the companies to AWS while the input and output remain the same, said Ofer Elboim, senior tax partner at Shekel and Co. law firm in Tel Aviv.

“The registration is more important in the eyes of the authorities in Israel, because in some way it’s accepting the position that this company that has activities in Israel and is selling services in Israel should be registered in Israel, Elboim said May 17.

But it will impact companies. Once registered, multinational companies could be liable for other taxes, Biran said.

“The other matter, beside the VAT, is the income tax issue,” Biran said in a May 17 interview. “Now you have an Israeli company, which has an operation in Israel, which issues invoices to Israeli customers, and of course all of this operation will be taxable in Israel.”

“The tax circular 4/2016, which also deals with the income tax aspects of the operation of the multinationals, in addition to the VAT issue, also mentioned the exposure to the income tax liability of this operation. Now Amazon Web Services Israel will need to pay Israeli tax on its operation,” Biran said.

Amazon Sets Precedent

The operation of an Israeli subsidiary raises the issue of transfer pricing between the local company and its parent, Biran said.

“How much profit you will allocate to Israel? What will be the transfer pricing between Israel and the U.S. or any other jurisdiction? It’s something that Amazon will need to take into account,” he said.

Biran said his multinational clients, many of whom took the position that they weren’t liable for VAT in Israel, would be studying Amazon’s decision and its implications.

“Amazon has created a little bit of a precedent,” he said. “Any multinational company should expect that there will be an audit at some point regarding its tax liability in Israel.”

The AWS decision regarding Israel is a by-product of the company’s response to pressure from the European Union on base erosion and profit-shifting prevention measures and the liability of multinational companies to pay tax in local jurisdictions, said Harel Perlmutter, head of tax at Barnea law firm in Tel Aviv.

“The world has started to change,” Perlmutter said May 16. “It’s not supposed to be any different if someone has his shop located physically in a country or the shop is online providing the same services to the same people.”

“That was part of the BEPS program,” he said. “An entity providing services online in a specific country has to pay taxes in that country as well. I think we’re going to see that more often from multinational corporations. This is just the first step to what we will see in the future—more multinational companies opening tax and VAT files in Israel in order to comply with the local and international tax law.”

Wait and See

Amazon’s general retail sales are unlikely to be affected in the near future, Perlmutter said. VAT is already applied to orders above $75, which is collected by the postal or delivery service.

“The day that Amazon or other companies like it will have to collect VAT from their retail sales is not so close. It will take more time until we see retailers needing to collect VAT outside of Israel and sending it to the tax authorities here,” he said.

To contact the reporter on this story: Matthew Kalman in Jerusalem at

To contact the editor responsible for this story: Penny Sukhraj in London at

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