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The Internet has largely become a key international platform for commerce and the
delivery of services. The sale of products and the provision of services are carried out
remotely, without an actual physical “bricks and mortar” presence in the country in
which the consumer is located.
In April 2016, following the publication of the BEPS report, the ITA published a
tax circular addressing the taxation of foreign entities that operate in Israel via the
internet. The circular specifies circumstances in which a foreign entity might be
treated as having a permanent establishment (“PE”) in Israel and thus subject to tax
in Israel. In addition, the circular determines that a foreign entity that has a "significant
digital presence" in Israel might be regarded as having a PE in Israel. The circular
provides certain examples for this new concept such as a significant number of Israeli
customers use the services of the foreign entity or the online services are tailored to
Israeli customers.
The circular also imposes reporting requirements on online businesses operating in
Israel and briefly deals with certain VAT repercussions.
Inclusion of Tax Offences in Prohibition on Money Laundering Law
In April 2016, Prohibition on Money Laundering Law, 2000 (“Law”) was amended,
adding several tax offences pertaining to Income Tax, Value Added Tax and Real Estate
Tax as money laundering offences (“Amendment”). The Amendment came into force
on 7 October 2016.
The Amendment sets out several implications including stricter sanctions of up to
ten years in prison; exchange of Information between the Israel Money Laundering
Prohibition Authority and the ITA; and the property of the offender may be confiscated
up to the sum of the property that was used in the offence, or used to commit the
offence or was intended for the purpose of making the offence.
Voluntary Disclosure Procedure
In September 2014, the ITA launched a voluntary disclosure program (“VDP”) to grant
non-compliant taxpayers the opportunity to voluntarily disclose their previously
unreported tax affairs in exchange for the ITA (in collaborationwith the State Attorney)
undertaking not to initiate criminal proceedings. The VDP applies to undisclosed
income and assets, whether in Israel or abroad, passive or active.
Until 31 December 2016, voluntary disclosure applications under the VDP may be
filed through one of the following paths: (i) a “regular” application; (ii) an anonymous
application; and (ii) a short "green route" application.
Until recently, the ITA did not handle voluntary disclosure applications by diamond
dealers due to the complex nature of the taxation framework of the diamond industry.
However, participants of the diamond industry may now submit voluntary disclosure
applications under the VDP. In addition, the ITA recently published a notice that the
VDP shall apply also to offences of money laundering originating from tax offences.