Israel is jumping on board the digital and crypto tax bandwagon

Israel’s proposed 2023-24 budget law shows that the new government is rolling up its sleeves to get started on the tax front.

The tax proposals i.a.

• Encourage a more affordable housing market by limiting residential property tax breaks;

• Combating inappropriate behavior regarding VAT receipts;

• Enforce partial payment of tax debt, even if an appeal is pending in court;

• Limit the amount of cash used for transactions; and

• Abolish the 0% VAT benefit for tourism-related services and hotels.

Other important proposals involve cutting a portion of the tax from, and regulating, digital business; create a sales tax on certain digital services provided by foreign providers; and find ways to tax income from, and regulate, trade in digital assets.

The Israeli government has proposed an amendment to the Value Added Tax Law, 1975, in an effort to ease the collection of VAT on digital services purchased by residents of Israel from foreign suppliers.

Today, responsibility for payment of 17% VAT on incoming services from non-resident businesses rests with the Israeli recipient. The amendment seeks – in line with the OECD’s development plans and recommendations – to oblige the non-resident service providers to register in Israel and charge, collect and pay VAT. The creation of a VAT registration obligation for foreigners was first proposed in 2016, and appeared in several other bills, none of which came to fruition.

The creation of a VAT charge on incoming digital transactions should primarily neutralize the perceived “economic discrimination” of local businesses that offer similar services and charge VAT to their local customers. But an expected revenue of $100 million in 2023 – and then of around $140 million each subsequent year – is an interesting forecast for the Jerusalem treasury.

The note to the bill explains that a digital service is a “service offered via the Internet or by other electronic means, which allows the brokerage of service providers and the sale of intangible goods, including visual or audio content, distance learning, access and use of applications, author content, games, etc. .Television, broadcasting services and services provided by the transmission or reception of signals, words, sounds, images, etc. through a fiber optic cable, radio transmission or other electromagnetic system would also fit.

VAT on services to VAT-registered businesses, voluntary organizations and financial institutions can already be self-reported (by reverse charge) and paid by these entities. The disadvantage for the last two types of organizations is that they are not entitled to set off the input VAT they charged themselves, and it becomes a large cost.

The bill does not yet specify the manner of registration or reporting. In a new regulation, the Minister of Finance must determine how foreign VAT-registered businesses registered in the special foreign provider register must act, keep archives and keep documentation for at least seven years (including data about the service provided, presentable within 30 days of demand from the assessor).

The plans shall enter into force the moment the legislation is accepted and promulgated as law by Israel’s parliament, unless the law specifies a specific date and any grandfathering rule. The draft will definitely bring about some changes in the final legislative phase ahead of us.

The bill presents a framework for the organization of, and infrastructure related to, digital assets and their trading, including regulatory, security and banking legislation.

The proposal classifies “digital currencies” as assets in the Income Tax and Value Added Tax Act. The profit on a sale or exchange of a virtual currency is subject to capital gains tax at a rate of 25%. Non- and incorrect reporting can trigger criminal proceedings and penalties.

The draft law prescribes, among other things, how the historical cost price and purchase time of a digital asset must be determined, and defines the “location” of an asset. The latter is central to taxation, as domestic and foreign assets result in different Israeli tax rules for different types of taxpayers. Sales of digital assets carried out through supervised and licensed entities will be subject to withholding tax, and if the relevant tax is charged at source, the taxpayer is exempt from further reporting. Resident taxpayers must inform the authorities when their digital assets are worth more than ILS 200,000 (about $52,000) if they are not held through a qualified “supervisory entity” on a regulated platform.

The Bank of Israel can set up a bank account to which taxpayers can transfer tax due. Today, payment of taxes by a willing taxpayer is a difficult task; banks in Israel will often not accept transfers originating from crypto activities, for fear of money laundering. In connection with this, the Norwegian Banking Authority must create an infrastructure for reporting, monitor the issuing of licenses to entities that wish to facilitate trade in digital assets and decide whether a bank rightfully refuses to open an account or transfer.

The bill deals with decentralized autonomous organizations (DAOs, 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 Financial Services Supervisory Authority will be empowered – under the Financial Services Control Act – to grant licenses to (foreign) entities wishing to provide services, provided they meet all (new) conditions. A foreign service provider applying for a license must also convince that it provides adequate protection against financial risks (considering recent international crypto thefts) and comply with Israel’s Anti-Money Laundering Law. The government has also published an intention to create infrastructure for services related to backed-up digital assets.

Not only does the proposal ensure regulatory oversight and financial protection, but the constellation of bills surrounding digital asset trading may actually encourage foreign players to offer digital asset services in Israel.

The final text of this proposal will be submitted to Parliament for approval on 29 May.

All in all, Israel can take excellent steps to ease crypto trading out of the corner it has been in, but also to open its borders, which will surely benefit Israel’s economy, a proven leader also in blockchain technologies.