Israel's Immediate VAT Payment Reform Sparks Business Opposition Ahead of Legislation

Israel's planned reform to implement immediate VAT payment, revealed this week by Tax Authority Director Shai Aharonovitch, has not yet been legislated but is already stirring controversy among tax experts and business representatives. The reform aims to combat fake invoices that cost the state billions annually by requiring real-time VAT reporting and payment at the moment transactions occur. Under the new system, invoices would be automatically transmitted to the Tax Authority, and VAT would be paid immediately through integrated accounting software or digital cash registers.

The reform represents a fundamental shift from the current VAT payment system, which is based on accrual accounting, to a cash basis where VAT is paid only upon receipt of payment. This change has raised concerns about cash flow difficulties for businesses, especially small and medium enterprises, as immediate VAT payments could create financial burdens without guaranteed immediate input tax credits or refunds.

Chen Schreiber, President of the Israeli Institute of Certified Public Accountants, sent a letter opposing the reform, warning it could negatively impact business operations, credit terms, and commercial decisions. He emphasized the risk of tax considerations distorting economic transactions and highlighted the need for clear rules on immediate input tax deductions and refunds. Schreiber also criticized the extensive data collection the reform would entail, calling for strict limitations on its use.

Legal experts like attorney Rani Schwartz noted that the reform changes the fundamental tax timing rules and questioned how the system would handle input tax credits and VAT refunds, which currently can take considerable time. Schreiber further warned that increased compliance costs might ultimately be passed on to consumers, potentially raising the cost of living.

Although the reform is expected to be included in the 2027 state budget legislation, its final form and approval remain uncertain. Meanwhile, opposition from key stakeholders such as the accountants' association signals significant challenges ahead for the government's VAT overhaul plan.