Setback on Google Ads May Cost Israel Millions in VAT Refunds

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By Matthew Kalman

The Israel Tax Authority stands to refund millions of shekels in VAT after two Israeli publishers successfully appealed the authority’s decision to apply VAT to online advertising space used by Google.

Since the publication of professional circular 4/2016 in April 2016, the authority has sought to collect both VAT and income tax on the activities of multinationals in Israel, even when those transactions are conducted by a foreign company with no permanent establishment in the country.

In VAT assessments dating to the 2014 tax year, the authority demanded that Israeli publishers deduct and remit VAT from payments from Google Inc.’s Ireland-based subsidiary for advertising space, even though the companies were unable to collect VAT from an Irish company.

In April, a large Israeli communications company lodged an administrative appeal against the tax authority’s VAT assessment of its dealings with Google, and won. The victory followed the precedent set in November 2017 by the Kikar Shabbat publishing company when the tax authority also agreed to waive its demand for VAT payments on Google’s payments rather than plead its case before the Jerusalem District Court.

Double Defeat

The double defeat could require the tax authority to return “tens of millions of shekels” in VAT to Israeli media companies taxpayers, said David Helfer, the Jerusalem attorney who represented Kikar Shabbat in November.

“The agreement has the authority of a court decision. It’s an agreement by the tax authority to reverse their earlier position,” Helfer said May 22. “Every media business in Israel will have to be credited retroactively for the VAT they have paid to the authority on these transactions. The authority will have to review every advertising deal between Google and an Israeli publishing company, including all the major Israeli media, since 2014.”

“All the previous cases with the tax authority ended with an agreement. We refused to give in to this demand, which was unjustified, and when the tax authority was required to defend it in court, they simply fled,” he said.

Foreign Residents

The tax authority should never have demanded VAT on the sale of non-tangible assets to unconnected foreign companies where Israeli taxpayers are unable to recover the input tax, said Ofer Elboim, senior partner at Shekel and Co. law firm in Tel Aviv, who represented the publishing company in the case that ended in April.

“Our claim was that Google, as a company not established in Israel and not registered as a business in Israel, is a foreign resident and as such is zero-rated for VAT,” Elboim told Bloomberg Tax May 17. “Google Ireland will not pay us VAT when they cannot deduct the VAT. If the authority wants to demand the VAT from us they should register Google and after that we can charge VAT and they will be able to deduct the input.”

“I know that after I got my ruling, some companies approached the VAT authorities and demanded refunds of VAT that they paid and in some cases I know they got it,” he said.

Despite the setback, the tax authority has not changed its policy, nor abandoned its desire to tax the multinationals as expressed in its “infamous 2016 circular,” said Yuval Navot, tax partner at Herzog Fox and Neeman law office in Tel Aviv.

The authority “realized that it is not successful in enforcing its policy to register non-Israeli internet companies for Israeli VAT. The thinking here is that the local Israeli businesses should not bear the cost of this enforcement failure,” Navot said by email May 22.

The retreat “addresses VAT on transactions between unrelated parties. It remains to be seen whether this ITA decision would equally apply to transactions between related parties,” he said.

The tax authority “acts to maximize the taxation of activities in the digital economy and the registration of international companies in Israel in various ways and by all means, including legislation, the publication of professional circulars and other actions, which it would not be appropriate to specify here,” a spokesperson said by email May 22, declining to comment on specific cases. “Moreover, the authority acts in accordance with the prevailing legal situation and not from the position of granting concessions to those international companies.”

Google declined to comment.

Looking ahead, Elboim agrees that the authority will continue to pursue multinationals. “I guess they will try to enforce this opinion and to have them register in Israel,” he said.

Amazon Invoicing

A decision by Amazon Web Services, announced May 14, to start invoicing its customers through a local VAT-registered subsidiary from July 1 may pave the way for other internet giants to do the same, he said.

Israel will have a hard time levying VAT on foreign companies without reciprocal arrangements with other countries, Helfer said. “If there’s to be any change it will occur in the framework of an international treaty and not in the context of a change in the law in a particular country.”

To contact the reporter on this story: Matthew Kalman in Jerusalem at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj in London at psukhraj@bloombergtax.com

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