In this week’s Torah portion, Jethro, we read how Moses, set up an hierarchical court system in the desert, in order to best hear disputes and judge matters between people.
It is doubtful however, that he needed to adjudicate on the VAT implications of supplying a Sefer Torah – a Jewish holy scroll containing the five books of Moses.
This eminent task was recently left up to Judge Orenstein of the Tel Aviv District Court in the case of Yosef Ozeri versus VAT – Gush Dan. (Tax Appeal 36948-09-10, December 29, 2014).
The case involved a Sofer (Jewish scribe) Stam (Sefer Torah, tefillin and mezuzot) in Israel who was commissioned by a member of a Yemenite Jewish community in London, to write a Sefer Torah on his behalf. This was duly done over a period of about eight months, working around five hours a day.
At the end of the process, the Sofer issued a Tax Invoice/Receipt and charged VAT at zero rate, contending that he was providing a service to a specific foreign resident and that under section 30(a)(5) of the Israeli VAT Law he is entitled to such a zero-rating.
The VAT official in charge of his casefile had other ideas, contended that the Sofer was not supplying a service but in fact making a sale of goods to a foreign resident.
If so, under section 30(a)(1) of the VAT Law, a sale of goods to a foreign resident can only be zero-rated if the seller has it properly written up on customs exit documentation; otherwise, the sale is liable to VAT in full and the Sofer therefore owes the VAT which on an item that can sell for up to, say, $30,000 , is very significant.
At the current Israeli standard VAT rate of 18% that would amount to $5,400. Moreover, Israel is not in the EU and the Yemenite, London Community cannot recover the Israeli VAT in the UK.
Was it a supply of goods or a service?
Section one of the VAT Law defines a “sale” as, ‘In relation to an asset, including…the right to use such an asset in exchange for payment.’
“Asset” means goods or land;
“Services”- All deeds in exchange for payment, other than a sale, including credit transactions, depositing money…”
Therefore the VAT Law is vague. It appears there are no all-encompassing rules in the matter, and it came down to the judge’s discretion.
The Court’s Findings:
Firstly the judge stated that one of the major tests is the relationship of the cost of the raw materials to that of the labor: In the case of a Sefer Torah, the cost of the ink and parchment is only about 10% whereas hundreds of hours are spent by an expert, in the actual writing.
Secondly, the judge applied the fiscal principle know as, “economic substance over legal form”, saying that technically, the definition of a sale of an asset might fit the letter of the law as stated but that the essence of the transaction was in providing the writing service to a recipient who hired a scribe to perform such a service.
Judge Orenstein then looked to the Jewish sources including the Torah itself. The judge quoted Deuteronomy 31:19 which speaks of the commandment for every Jew to write his own Sefer Torah.
The judge distinguished between mitzvoth (Jewish commandments) that one is obligated to perform for himself (e.g. giving to charity) versus those where one may appoint an agent on his behalf such as the commandment of circumcision, whereby the father usually, (and quite happily) avails himself of the services of a qualified mohel.
Which category, according to the court, does the writing of a Sefer Torah fall into?
The judge then quoted from Tractate Menuchot in the Talmud (Oral law) which asks the question: knowing that it is a positive commandment for a Jew to write a Sefer Torah, what must one do if he doesn’t have the ability to do so? The answer given is that he must avail himself of the services of a Sofer stam to do it for him in return for payment and that the hirer can meet his religious obligation by himself writing just one letter of the completed scroll. This was what transpired in this case.
Therefore, concluded the judge, the scribe was hired for the service of assisting the hirer to fulfill a specific religious obligation. As a service, zero rate VAT applied to the supply of the Sefer Torah to the overseas buyer.
Had the Sefer Torah been first written and then sold to anyone willing to buy it, there is an argument that perhaps this could be a “sale” of goods, liable to 18% VAT.
But in this case where, there was a specific obligation to write the Sefer Torah and a scribe was hired specifically by an overseas individual to help him fulfill this obligation, then the argument swings the other way towards a “Service” with zero rate VAT.
Firstly it must be noted that since it was a District Court case, the judge’s ruling is binding only on the two parties involved and is therefore potentially subject to appeal.
We believe however that in this case, the judge got it right and essentially deflected a troubling challenge from the VAT Authority.
And the issue may not stop with supplying a Sefer Torah. Consider for example, the situation of a lawyer or an accountant who prepares an opinion for an overseas client.
Or consider the case of a hi-tech company which ships a prototype computer chip containing complex algorithms on a disk (that took hundreds of programming hours to develop), to an overseas customer.
Are these assets or services being supplied?
Typically these are regarded as services and the above judgment supports this.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writers are tax specialists at Harris Consulting & Tax Ltd.