Israel: Analysts Evaluate Israel Tax Authority's Plans For A Digital Tax

Last Updated: 21 May 2019
Article by William Hoke

A reported Israeli plan for a digital services tax could provide a sounder basis for taxing multinational groups than previous attempts that relied on permanent establishment arguments or claims the groups are subject to VAT.

On April 28 both the Haaretz and Globes newspapers published reports that the Israel Tax Authority (ITA) and the Ministry of Finance have been working on plans for a DST. Both articles mentioned the 3 percent tax on the turnover of digital companies that is being considered by the French parliament. Frustration over the relatively low amount of tax paid by foreign-based online groups prompted the French government to propose the DST, which would be payable by companies with global digital turnover of at least €750 million and French revenue of at least €25 million. The proposed French tax would apply to sales from online advertising and the sale of consumer data, and to revenues derived from serving as an intermediary between sellers and buyers.

Yuval Navot, a tax lawyer with Herzog Fox & Neeman, said the planning for an Israeli DST is an initiative of the MOF and the ITA to fund the budget for the new government following the April 9 elections that saw a right-wing coalition under Prime Minister Benjamin Netanyahu secure a majority of seats in the Knesset.

Henriette Fuchs, a tax lawyer with Pearl Cohen Zedek Latzer Baratz, said the discussions about a DST are nonpolitical. Like many other countries, "Israel . . . is trying to assert ways in which to fairly — and hopefully modestly — tax foreign companies selling goods and services in Israel," she said.

Navot said that while the planning for the DST is still in the early stages, he can't rule out the possibility that it will be enacted into law.

Although Haaretz reported that the ITA had discussions with internet companies over the payment of tax based on a circular published in April 2017, Navot said the tax agency's position was actually based on ITA Circular No. 4/2016, which was issued a year earlier. He said that the MOF and the ITA might have shifted their focus to a DST after recognizing that the tax agency's earlier position, as outlined in the 2016 circular, that foreign-based internet groups have a PE in Israel was problematic and was based on a very aggressive interpretation of the PE concept under the country's network of tax treaties.

"The legal difficulties stem from the fact that the April 2016 circular is based on the interpretation of the existing law with no legislative change," Navot said. "It applies for tax periods that predate the entry into force of the [OECD's] multilateral instrument, which poses even more difficulties for companies resident in countries that are counterparties to the MLI. The current proposal reflects a different position, which is to abandon the battle with the internet companies over whether or not such companies have an Israeli PE and to look for a legislative solution."

The multilateral instrument addresses treaty shopping and provides jurisdictions with the tools to implement binding arbitration and fight tax avoidance by multinational enterprises. It was adopted by the OECD in 2016 to provide signatories with a quick way to put into place recommendations of the base erosion and profit-shifting project by updating the existing network of bilateral tax treaties.

The Haaretz article reported that, "for the large companies, such as Google, tax assessments were begun." Fuchs said that while the ITA might have issued significant tax adjustments, they were probably not based on Circular No. 4/2016. "It is likely that these assessments would be based on a narrower interpretation of tax law and treaty commitments and not on the circular," she said.

In April 2018, eBay Marketplace Israel Ltd. said in a court filing that it had received tax assessments totaling ILS 156 million (around $43 million). "EBay's local subsidiary has been served with significant assessments in Israel," Fuchs said. She added that, in most cases, it is likely that a multinational group would have a local Israeli affiliate that was not merely doing research and development or providing intragroup services, but instead was actually representing the foreign related party as a seller or a provider of services to ultimate customers in the local marketplace.

Previous VAT and PE Positions

Fuchs said the 2016 circular has no standing in law. "[While] the Israel tax authorities like to attribute binding power to their circulars, a circular is not a government-backed legislative position," she said. "It is merely the interpretation of the taxing authorities appointed to implement and enforce the law, and not to write law."

In January 2017, amendment 238 to the Income Tax Ordinance was proposed to carry out, among other things, a conceptual repositioning of the understanding of a foreign group selling in Israel for transfer pricing purposes and the legal presumption of a PE in Israel, Fuchs said. "The concept of permanent establishment is currently, as such, not embedded in the income tax ordinance of Israel," she said. "Right now, there is no definite view [about that] because the head of the tax authorities is waiting for the new finance minister to be appointed before an actual legislative proposal will [or] can be sponsored and advanced."

Navot said a previous proposal by the ITA that internet companies be required to pay VAT when they engage in business-to-consumer transactions was blocked by the MOF. "It remains to be seen if this initiative will also be promoted alongside the DST, or whether the focus will be just on DST [under the assumption] that VAT will increase the cost of living of Israeli consumers because Israeli consumers end up bearing the cost of the VAT, even though the formal taxpayer is the non-Israeli Internet company," he said.

Fuchs said concern about VAT explains part of the ITA's reasoning for promoting a DST. "One of the reasons why inclusion of foreign-based providers of services [over] the internet seems to be called for is because local providers of such services are fully taxed and must also charge VAT, [which] puts them at a competitive disadvantage compared to foreign . . . suppliers who supposedly — which is still not proven — pay less tax," she said in an email.

She said that in 2014, the High Court of Justice dismissed a petition demanding that the tax authorities force foreign digital service suppliers to charge and pay VAT. "The High Court of Justice dismissed the petition [by] explaining it found the petition premature and [said] that in the digital world, internet transactions can trigger complex issues, which have broad tax implications that need to be addressed by the legislature and the [ITA]," Fuchs said. "The Court also explained that because the [ITA] was in the process of formulating a professional circular on the taxation of internet companies and transactions, it did not find it appropriate to interfere (yet)."

After the release of Circular No. 4/2016, the state comptroller and the ombudsman of Israel released a report criticizing the ITA's approach on enforcing tax laws via circulars and not by amending legislation, Navot said. "The report is a somewhat positive development in that it confirms that domestic and treaty law changes in response to BEPS should come in the form of new legislation and amendments to treaties as opposed to through administrative fiat," he said. "The downside, however, is that it strongly suggests that the state comptroller approves of the substantive rules set forth in the circular and merely disapproves of the manner in which they have come into being, and the selective and inconsistent manner in which they are being enforced."

Navot said the ITA refuses to allow Israeli-based internet companies to take foreign tax credits for turnover-based taxes similar to a DST that they pay in non-Israeli countries. "I believe that passing DST legislation, which would essentially be a substitute for an income tax charge, will put pressure on recognizing such taxes as creditable taxes," he said.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions