Assigning tax invoice numbers – what do you need to know?

The new law regulating the issue of assigning tax invoice numbers, enacted as part of the Arrangements Law for the years 2023-2024, changes the rules of the game for businesses in Israel. The main goal of the law is to combat the phenomenon of fictitious invoices and strengthen transparency in VAT reporting processes. At the same time, the law poses significant challenges to traders, who are expected to prepare for the new regulations that require them to contact the VAT Administrator to receive tax invoice allocation numbers, especially in transactions involving large amounts.

What is the assignment of a number to a tax invoice ?
According to the new law, starting January 1, 2024, any business wishing to issue a tax invoice exceeding NIS 25,000 (before VAT) will be required to obtain prior approval and an allocation number from the VAT Administrator. The requirement will gradually apply to transactions in lower amounts, until in 2028 the obligation will apply to any invoice exceeding NIS 5,000.

The purpose of the new mechanism is to ensure that invoice details are transmitted immediately and in an orderly manner to the tax authorities, as part of the fight against the phenomenon of fictitious invoices – that is, invoices issued by businesses that do not actually exist or that do not reflect real transactions. All this with the aim of avoiding tax fraud and strengthening the fiscal and public system.

The process for approving an assignment number

1. Submitting an application : Dealers will be required to submit an application for assignment of a tax invoice number through a dedicated digital system of the Tax Authority. This request will include basic details such as: the dealer’s number, customer details, transaction amount and VAT. This process is expected to be carried out in most cases through the business’s existing accounting software, which will make it possible to streamline the process and reduce human errors.
2. Reviewing the application and approving it : After receiving the application, the Tax Authority will review the information entered and verify its consistency with additional data from the trader’s past. In cases where additional data is required, the dealer may be contacted to clarify the information. The authority’s decision will be sent automatically within a short time, and in exceptional cases within a few days.
3. Rejection of the application : In the event of rejection of the application, the trader will have the option to appeal the decision through a hearing mechanism. This process will allow the trader to present his position and provide all the information required to clarify the situation. The final decision will be made after the hearing and sent to the dealer within one business day.
4. Objection and appeal mechanism : If a business does not agree with the Tax Authority’s decision, he may submit an objection within 30 days of receiving the notification of the rejection of the application. In cases where the acquisition is rejected, the trader has the right to appeal to the District Court. The need for legal advice in the event of an appeal should be emphasized, as this is a legal process that can lead to significant consequences for the trader.
   The implications for practitioners
   The new law poses operational and legal challenges to dealers, especially those who run large businesses with a high volume of transactions. A delay in receiving an assignment number may paralyze business activity, cause damage to reputation, and delay payments to suppliers, which can lead to serious financial damages. Criticism of the law
   Although the goal of the law is commendable and has great importance in increasing transparency and enforcement by the Tax Authority, many practitioners criticize the implementation of the mechanism, which is sometimes seen as too rigid:
   1. Lack of flexibility : An automated approval process in many cases is carried out without human intervention, which limits the ability to take into account unique considerations for each case. In cases of errors in information or technical problems, the lack of flexibility can lead to rejection of applications.
   2. Short schedules : The short schedule for holding the hearing may be challenging for practitioners who need additional time to prepare and organize with the authorities. The hearing may prove to be a complicated procedure for businesses that did not expect it in advance.
   3. Implications for ongoing operations : Businesses that do not receive allocation numbers on time may encounter cash flow difficulties that could paralyze their operations. Inability to issue tax invoices with an allocation number may cause payment delays, problems with suppliers, and even damage to business reputation.
      Similarity between failure to allocate a tax invoice and failure to approve withholding tax
      The new mechanism for assigning tax invoice numbers resembles the sanctions imposed by the tax assessor in cases of failure to approve a reduced withholding tax rate. For example, in a ruling issued in the case of Li-Oz Shemesh and Magen Security and Protection Ltd. (Case No. 26743-04-21) , it was determined that the tax assessor’s authority to limit the withholding tax rate should be based only on recent defaults and not on historical defaults. This approach should also be adopted in the context of allocating tax invoices, so that the administrator’s decisions are based on current information and not on past investigations or deficiencies. How to prepare for change ?
      1. Upgrading accounting systems : Ensure that the business’s accounting systems are adapted to the new requirements and are directly connected to the Tax Authority system. This ensures that requests for invoice number assignment are carried out automatically and efficiently.
      2. Maintaining a proper business portfolio : Ensuring accurate and ongoing reporting to the tax authorities is essential to avoid problems with the Tax Authority. Documenting past deficiencies may lead to refusal to receive assignment numbers, so it is recommended to maintain an orderly and standard business portfolio.
      3. Obtaining legal advice : Consulting with a lawyer specializing in tax law may help in dealing with cases of rejection of applications or when preparing objections and appeals. A lawyer can guide the trader regarding his rights and assist in situations where the Tax Authority’s decision is not satisfactory.