One of the modern mysteries of our time is how to invoice and record international revenue sharing transactions under Israel’s rigid bookkeeping tax regulations.
Fortunately, the Israeli Tax Authority has just come to the rescue with a tax ruling (number 3956/16) on “the price of a transaction for the purchase of services via an App” for Israeli VAT purposes.
This may not sound too exciting, but the start-up nation can now start making money more easily.
Facts of the Case:
An Israeli company, registered as a dealer for Israeli VAT purposes, developed an App intended for mobile devices. The App enables users to buy various services provided by various suppliers. Therefore, in practice, the company acts as an agent between suppliers and users via the App.
The suppliers fix the price for the services and the company cannot change it. The App is available for download at the App stores on smartphones.
The Company transfers to each supplier payments made by users minus a commission at a certain rate of the payments in consideration for agency and publicity services which the company provides the suppliers, i.e. a revenue share.
If the services ordered by the users are not supplied, the Company refunds the money paid by the users.
The Ruling cites Section 6 of the VAT Regulations, which says in part: If an amount is paid by a dealer as an expense for its client, and an invoice or other document approved by the VAT Director was issued, it will not be considered part of the transaction price i.e. the expense doesn’t count as part of the recipient’s revenue liable to VAT).
If such an amount is received but not yet paid onwards, it will considered as a deposit, if certain conditions are met.
The law lays down a few conditions. The deposit generally cannot last more than 6 months unless a longer period is normal in the sector concerned. The invoice to the customer must spell out the expense to be paid. And the deposit must be lodged in a separate bank account.
The Ruling amplifies these rules for App users. When the user pays, the company should issue a receipt only. A copy of the user’s order must be attached to a copy of the receipt in the accounting system. As for the commission from the supplier, the company should issue a tax invoice which identifies the order for which the commission is received.
If the company has any money which is not passed on to the suppliers, for any reason, the company will be liable to VAT on such money.
The Ruling clarifies that if a company does pass on the App’s user’s money to the supplier, the company will be liable to VAT only on its commission, not on the full amount received from the user, if the above conditions are met.
For example, if the user pays NIS 100 to use an App and the supplier pays 10% of that as commission to the company concerned, the company collects VAT 17% at present on NIS 10 instead of NIS 100.
This help App agents a lot, but it leaves open a few issues.
First, how will the supplier account for VAT on the money it receives from the customer (VAT on NIS 90 in the above example) ?
If the supplier is abroad, it is unlikely to pay Israeli VAT even though it is supposed to if its customer (the user) is an Israeli resident according to Section 15(2) of the VAT Law.
In practice, this is rarely enforced but the VAT Authority has indicated it might step up the enforcement for digital enterprises.
Second, can this ruling be applied to other agency activities e.g. foreign real estate agency transactions?
Third, the income tax position is uncertain. Last October, the OECD issued extensive guidance targeted at base erosion profit shifting (BEPS), i.e. fiendish tax planning that shifts profits offshore.
In particular, if a local agent convinces a local client to buy a product or service of a foreign supplier, the agent may be deemed to be a “dependent agent” and the supplier may be deemed to have a taxable “permanent establishment” in the local country concerned.
In this case, the foreign supplier may have an Israeli income tax exposure because of a local Israeli agent. This is an international problem, not an Israeli problem. The solution is to make sure the agent does no convincing!
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.