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...