Israel Value Added Tax (VAT)
Value added tax is thrust on any transaction completed in Israel. The VAT can be imposed on imports of goods, provisions of services, and other business activities. The VAT is a single rate from the sum of the transaction or the price of the goods. It also applies to all transactions executed by any person given the transaction is commercial and involves sales of goods or services.
Certain items are zero-rated, which means that no VAT is charged. Items such as exported goods and providing services to nonresidents are zero-rated. When importing goods, the value includes the customs duty, purchase tax, and other levies. Multinational corporations such as Google and Facebook must also pay the VAT tax rate when providing services to Israel through the internet. Electronic filing of the VAT is mandatory in Israel.
United States Sales Tax
In the United States, sales tax is levied by the states individually; there is no national sales tax. Every state has a different sales tax, and some states have no sales tax. For example, Oregon, Montana, Delaware, and New Hampshire have no sales tax. Some other states’ sales taxes are:
| California | 8.25% |
| Texas | 6.25% |
| Florida | 6% |
| New York | 4% |
These rates may seem very low because municipal sales taxes are not included. In New York, the total tax rate can be as high as 9% depending on certain local municipalities. While there is no federal sales tax, there are state and municipal sales taxes. This differs from Israel, where there is a national VAT rate.
Israel VAT Rate
The current VAT (value added tax) rate for Israel is 17.00%. The VAT is a sales tax that is applicable to the purchase of most goods and services. It must be collected and submitted by the vendor to the Israeli government revenue department. The Israel VAT differs from the United States’ sales tax; the US only charges on sales to end consumers while the VAT is charged on all sales, even of raw materials.
Sales Tax vs. VAT
Sales tax is collected by the seller when the sale is final. End consumers pay sales tax when they buy goods or services. When purchasing materials or supplies that will be sold again, businesses can publish resale certificates to retailers and do not have to pay sales tax. Sales tax is not collected until the sale is made to the final consumer. Also, tax jurisdictions do not receive revenue from taxes.
VAT is collected by each seller at every stage of the supply chain. Suppliers, manufacturers, distributors, and retailers all call for VAT on sales that are taxable. In addition, supplier, manufacturers, distributors, retailers, and end consumers all are required to pay a VAT on their purchases. To get reimbursed for the VAT paid on their tax return, corporations are required to track and document the VAT they pay on purchases.
Duty Free Shops
Duty free shops are retail stores typically located in airports or ports that are exempt from local or national taxes. These stores are popular because tax does not need to be paid. Their prices are often higher than at normal stores, but people save money by not paying tax. It is required for duty free shops that the consumers take the products out of the country.
Israeli Foreign Tax Relief
Double taxation is avoided because of a foreign tax credit mechanism that always applies in the absence of an applicable double taxation treaty. The foreign tax credit is restricted to the Israeli tax payable concerning the same income. Foreign-based income is divided into baskets on the foundation of income source (dividends, business income). A particular credit restriction applies to each basket. Surplus uncredited foreign income can be carried forward for the next 5 tax years.
Non-Israelis are not qualified to unilateral tax relief on foreign income. However, when the amount of tax payable in Israel can be shown to exceed the amount of tax credit available in the home country, a partial tax reduction can be given. The income must be Israeli-specific, and the Minister of Finance must order the tax reduction.
Recent Developments
Israel has been seeking introduction of a new digital sales tax. They intend to introduce a digital sales tax that would bring in around $280 million for the treasury. This digital tax would be for foreign digital companies in Israel. It would be a 3-5% digital sales tax rate.
