Israel jumps on board the digital and crypto tax bandwagon
Henriette Fuchs of Yaron-Eldar Paller Schwartz & Co reports on initiatives taken by the Israeli government regarding the taxation of digital services and the trading of digital assets.
Israel’s proposed Budget Law 2023–24 shows the new government is rolling up its sleeves to get to work on the tax front.
The tax proposals, inter alia:
Encourage a more affordable housing market by limiting tax breaks on residential property;
Combat improper conduct regarding VAT receipts;
Force partial payment of tax debt, although an appeal is pending in court;
Limit the amount of cash used for transactions; and
Cancel the 0% VAT benefit for tourism-related services and hotels.
Other significant proposals seek to cut a tax slice from, and to regulate, digital business; create a VAT charge on certain digital services offered by foreign providers; and find ways to tax income from, and regulate, digital asset dealings.
VAT registration obligation for foreign B2C digital service providers
The Israeli government has proposed an amendment to the Value Added Tax Law, 1975, in an effort to facilitate the collection of VAT on digital services purchased by Israel residents from foreign suppliers.
Today, the responsibility for the payment of the 17% VAT, on incoming services from non-resident businesses, rests on the Israeli resident recipient. The amendment seeks – in line with the OECD’s developing plans and recommendations – to obligate those non-resident service providers to register in Israel and charge, collect and pay VAT. The creation of a VAT registration obligation for non-residents was first proposed in 2016, and appeared in several other legislative proposals, none of which made it to the finish line.
The creation of a VAT charge on incoming digital transactions should first and foremost neutralise the perceived ‘economic discrimination’ of local businesses providing similar services and that charge VAT to their local customers. But an expected income of $100 million in 2023 – and then of about $140 million each following year – is an interesting forecast for the treasury in Jerusalem.
The memorandum of the proposal of law explains that a digital service is a “service provided through the internet or by other electronic means, allowing brokerage for service providers and the sale of intangible goods, including visual or audio content, remote teaching, entry and use of applications, authors content, games etc”. Television, broadcasting services and services provided by the transfer or receipt of signals, words, sounds, images, etc. through a fibre optic cable, radio transmission or other electromagnetic system would also fit the bill.
VAT on services to VAT-registered businesses, NGOs and financial institutions can already be self-reported (by reverse charge) and paid by these entities. The disadvantage for the last two types of organisations is that they are not eligible to offset the input VAT they charged themselves and it becomes a hefty cost.
The bill does not yet specify the manner of registration or reporting. The Minister of Finance shall set out, in new regulations, how foreign VAT-registered businesses registered in the special foreign providers registry should act, manage records and retain documentation for at least seven years (including data regarding the service provided, presentable within 30 days upon demand by the tax assessor).
The plans shall come into effect the moment that legislation is accepted and published as law by Israel’s parliament, unless the law indicates a specific date and any grandfathering rule. The draft will definitely incur some changes in the last legislative phase now before us.
A framework to enforce tax on digital assets
The draft bill presents a framework for the organising of, and infrastructure pertaining to, digital assets and their trading, including regulatory, security and banking law.
The proposal classifies ‘digital currencies’ as assets for the purpose of income tax and VAT law. The profit on a sale or an exchange of a virtual currency is subject to gains tax at a 25% rate. Non- and incorrect reporting can trigger criminal proceedings and penalties.
The draft law prescribes, inter alia, how the historical cost price and date of purchase of a digital asset must be determined, and defines the ‘location’ of an asset. The latter is pivotal for tax, as domestic- and foreign-held assets result in different Israeli tax rules for different types of taxpayers. The sale of digital assets executed through supervised and licensed entities would be subject to withholding tax and if the appropriate tax has been charged at source, the taxpayer is discharged from further reporting. Resident taxpayers would have to disclose to the authorities when their digital assets are worth more than ILS 200,000 (approximately $52,000) if they are not held through a qualifying ‘supervising entity’ on a regulated platform.
The Bank of Israel might create a bank account to which taxpayers could transfer tax due. Today, the payment of tax by a willing taxpayer is a difficult chore; banks in Israel will often not accept transfers that originate from crypto activities, for fear of money laundering. In connection with this, the Supervisor of Banks is to create infrastructure for reporting, to monitor the issuance of licences to entities wanting to facilitate trading in digital assets and to determine whether a bank is rightfully refusing the opening of an account or a transfer.
The draft bill wrestles with decentralised autonomous organisations (DAOs, which are comparable to partnerships) and an inter-ministerial committee will be appointed to establish the corporate and legal status of DAOs and their proper taxation.
The Supervisor on Financial Service Provision would be given the authority – under the Control on Financial Services Law – to license (foreign) entities wanting to provide services, provided they meet all the (new) conditions. A foreign service provider requesting a licence must also convince that it offers adequate protection against financial risks (bearing in mind recent international crypto thefts) and comply with Israel’s Prohibition on Money Laundering Law. The government has also published an intention to create infrastructure for services pertaining to backed digital assets.
Not only does the proposal ensure regulatory oversight and financial protection, but the constellation of legislative proposals surrounding digital asset trading may actually encourage foreign players to offer digital asset services in Israel.
The final text of this proposal will be before parliament for approval on May 29.
Heading in a good direction
All in all, Israel may be taking excellent steps to ease crypto trading out of the corner it has been in, but also in opening its borders, which will surely benefit the economy of Israel, a proven leader also in blockchain technologies.