Israeli Tax Authority Demands Immediate VAT Transfer, Sparking Business Sector Outcry

The Israeli Tax Authority has initiated a new policy requiring business owners and self-employed individuals to immediately transfer the VAT they collect from customers. This move simultaneously prevents them from offsetting VAT paid on business expenses, a change that has alarmed business leaders. Roy Cohen, president of the Federation of Israeli Chambers of Commerce (Laav), criticized the policy as a harsh measure that could push many businesses into liquidity crises. He urged the Finance Minister and the Tax Authority director to halt the reform immediately, emphasizing the lack of professional dialogue and the severe impact on cash flow and working capital for hundreds of thousands of small businesses and self-employed individuals.

Currently, businesses can offset the VAT they pay on expenses against the VAT they owe, but the reform would require full VAT payment upfront while delaying the input VAT credit. This timing gap forces businesses to finance the difference out of pocket, often requiring costly loans. Cohen highlighted that unlike many OECD countries that provide safety nets for small businesses, Israel is imposing additional burdens after years of conflict and the COVID-19 crisis. He warned of the social consequences, including increased financial distress and premature workforce entry by children to support families.

The Federation's research shows that in 2024, 27% of businesses seeking financing faced cash flow problems, with small businesses paying significantly higher interest rates than larger firms. Cohen stressed that the reform is not just an accounting issue but a direct threat to businesses' ability to pay salaries, suppliers, rent, and other expenses. Ahead of upcoming elections, Laav plans to rally political leaders to oppose the reform, declaring that small businesses will no longer be the state's financial scapegoats.