Israel Plans Real-Time Online VAT Payments to Combat Fake Invoices and Tax Losses

The Israeli Tax Authority is preparing a major reform called "Invoice Israel 2.0" or online VAT, which will require immediate VAT payment at the time of transaction. This digital upgrade aims to eliminate paper-based processes and create a seamless, real-time connection between businesses' accounting software or digital cash registers and the Tax Authority's systems. The reform shifts VAT liability to a cash basis, meaning VAT is paid only when the business actually receives payment, rather than at the time of the sale as currently mandated by law.

The plan was revealed by Tax Authority Director Shai Aharonovitch as part of reforms for the 2027 Arrangements Law. It updates the 1976 VAT law, which currently imposes a bureaucratic burden and enables fraud through fake invoices. VAT is a critical revenue source for the government, accounting for 143.3 billion shekels in 2024, about 30.2% of total tax income. Under the current system, businesses must report and pay VAT monthly or bimonthly based on sales date, even if payment from customers is delayed, forcing businesses to advance VAT payments out of pocket.

This timing gap facilitates fake invoice schemes, where fraudulent sellers disappear with VAT funds without remitting them to the state, causing an estimated annual VAT revenue loss of 15 billion shekels (a 10.5% VAT gap). Enforcement is largely ineffective due to the use of shell companies and intermediaries. Despite the existing "Invoice Israel" system requiring online approval for transactions over 5,000 shekels, fraudsters circumvent it by splitting transactions below the reporting threshold, leading to billions in unreported sales and lost revenue.

The new online VAT system aims to close these loopholes by enabling near fraud-proof invoicing and reducing bureaucratic burdens for businesses. The reform is expected to be included in the 2027 Arrangements Law alongside the 2027 state budget, to be approved by the next government. Tax experts note the system is unusual compared to Western VAT laws and may increase administrative burdens, especially regarding VAT refunds and proving invoice legitimacy. However, the Tax Authority believes the reform will benefit both the state and businesses by improving transparency and tax collection.

The reform reflects a broader effort to modernize Israel's tax infrastructure, reduce fraud, and secure vital government revenues amid ongoing challenges in VAT enforcement and compliance.