Foreign companies to pay tax in Israel
Israel to tax foreign companies for their online business activities Reuters

Foreign companies doing business over the internet such as operating websites, selling services like advertisement and brokerage in Israel will be required to pay value added tax (VAT) apart from income tax, according to new guidelines issued by the Israel Tax Authority. The firms will have to pay 17% VAT, in addition to income tax for their online business activities in the country.

Google, Facebook, Amazon and eBay are among the companies likely to be affected by the new government norm. These companies, along with others in the online business, will need to register as approved enterprises with the Israel Tax Authorities and file VAT reports.

So far, the foreign companies providing services in Israel were only subject to tax, but the authorities have now broadened the definition of "permanent establishment" to add online businesses as well.

The authorities had earlier raised concern in Parliament that oversees companies do not pay the same rate of tax as domestic companies. Responding to the issue, Facebook in a statement told Reuters, "Facebook pays taxes according to the law in every country it operates, including Israel."

Israel is not the only country imposing taxes on cross-border services; the Organisation for Economic Co-operation and Development (OECD) launched an initiative in November 2015 in response to the "growing concern from governments worldwide over the ever-rising volume of cross-border services and online downloads on which no VAT is paid, particularly on products bought by private consumers from e-vendors outside their home jurisdiction."

In 2014, Business to Consumer (B2C) e-commerce sales was estimated to exceed $1.4 trillion (£982bn), showing an increase of about 20% from 2013. B2C sales are expected to reach $2.4 trillion by 2018.

"The effective and consistent implementation of the recommended approaches for collecting the VAT on these digital sales will help jurisdictions to protect their VAT revenues and level the playing field between domestic and foreign suppliers", said Rintaro Tamaki, OECD's deputy secretary-general .

"It is very encouraging to see that a number of jurisdictions have already implemented the rules and the mechanism recommended by these Guidelines, or have expressed their intention to do so. They expect that these reforms will contribute considerable revenues to government budgets," added Tamaki.