Israel Considers 'Netflix Tax' on Foreign Digital Services

Israel's Ministry of Finance is looking to reintroduce a "Netflix tax" next year, which would apply value-added tax (VAT) to digital services purchased by Israeli consumers from foreign companies. Currently, Israeli businesses selling digital services are required to charge 18% VAT, while foreign companies often do not collect this tax from individual Israeli customers, creating a price disparity. The proposed tax aims to close this gap and would affect a wide range of digital services, including video and music streaming, app store purchases, online games, cloud storage, software subscriptions, e-books, and artificial intelligence tools.

The mechanism would require foreign companies selling these services to Israeli consumers to register with the Israel Tax Authority, add VAT to their prices, and remit it to the state. This change primarily impacts individual consumers, who have benefited from the de facto exemption until now. A monthly subscription costing 50 shekels could rise to 59 shekels if companies pass the full tax burden onto consumers, though some larger companies might absorb part of the cost to remain competitive.

This initiative is part of a broader fiscal strategy being examined by a team at the Finance Ministry, led by Chief Economist Dr. Shmuel Abramson. The team's analysis of artificial intelligence's impact on the economy suggests a potential decrease in income tax revenue as labor's share of GDP shrinks. To compensate, the ministry recommends shifting some tax burden towards consumption and wealth, with the "Netflix tax" being one component. Other proposals include taxes on luxury goods and vacant land, estimated to generate approximately 9.5 billion shekels annually when fully implemented.

Israel lags behind many developed nations in taxing these services; the European Union has mandated similar taxes since 2015, and Australia introduced its "Netflix tax" in 2017. In Israel, while shipments from abroad over $75 are taxed, digital services have largely remained outside the VAT net. The Finance Ministry estimates the "Netflix tax" could generate around 550 million shekels annually, an increase from earlier projections due to the expanded use of digital services and the current 18% VAT rate. The proposal requires legislative approval, and past attempts at similar taxes have faced political opposition.