The new law regulating the allocation of VAT invoice numbers, enacted as part of the Economic Arrangements Law for the years 2023–2024, significantly alters the framework for businesses in Israel. The primary objective of the law is to combat the issue of fictitious invoices and enhance transparency in VAT reporting processes. At the same time, the law imposes significant challenges on businesses, which are now required to comply with new regulations that mandate obtaining allocation numbers for VAT invoices, particularly for larger transactions.
What is the Allocation of a VAT Invoice Number?
Under the new law, starting January 1, 2024, any business seeking to issue a VAT invoice for a transaction exceeding NIS 25,000 (excluding VAT) will be required to obtain prior approval and an allocation number from the VAT Commissioner. This requirement will gradually apply to transactions of lower amounts, with the full obligation extending to all invoices over NIS 5,000 by 2028.
The purpose of this new mechanism is to ensure that VAT invoice details are immediately and systematically transmitted to the tax authorities, as part of the effort to combat the phenomenon of fictitious invoices—i.e., invoices issued by businesses that either do not exist or do not reflect genuine transactions. The aim is to prevent tax fraud and strengthen both the fiscal and public systems.
The Process for Obtaining an Allocation Number
- Submitting the Request: Businesses will be required to submit a request for an allocation number for VAT invoices through a dedicated digital platform of the Tax Authority. This request must include basic details such as the business identification number, customer information, transaction amount, and VAT. This process is expected to be carried out in most cases through the business’s existing accounting software, streamlining the procedure and reducing human error.
- Review and Approval: Upon receiving the request, the Tax Authority will review the provided information and verify its accuracy using additional data from the business’s records. In cases where further information is needed, the Tax Authority may contact the business for clarification. A decision will be sent automatically within a short period, and in exceptional cases, within a few days.
- Request Denial: If the request is denied, the business will have the option to appeal the decision through a hearing mechanism. This allows the business to present its position and provide any necessary information to clarify the situation. The final decision will be made after the hearing and sent to the business within one business day.
- Objection and Appeal Mechanism: If a business disagrees with the Tax Authority’s decision, it may file an objection within 30 days of receiving the denial notice. If the objection is rejected, the business has the right to appeal to the District Court. Legal advice is essential in cases of appeal, as this is a legal process that can have significant consequences for the business.
Implications for Businesses
The new law introduces both operational and legal challenges for businesses, particularly for those handling high volumes of transactions. Delays in obtaining allocation numbers could disrupt business operations, damage reputations, and cause delays in payments to suppliers, potentially leading to significant economic consequences.
Criticism of the Law
While the purpose of the law is commendable and crucial for enhancing transparency and strengthening the enforcement capabilities of the Tax Authority, many businesses have raised concerns about the rigid implementation of the mechanism:
- Lack of Flexibility: In many cases, the automatic approval process is carried out without human intervention, which limits the possibility of considering unique factors on a case-by-case basis. In instances of errors or technical issues, this lack of flexibility could result in the denial of requests.
- Tight Deadlines: The short deadlines for the hearing process may pose challenges for businesses needing more time to prepare and organize their responses with the authorities. The hearing process may be perceived as complicated for businesses that did not anticipate it.
- Impact on Ongoing Operations: Businesses that fail to receive allocation numbers in a timely manner may face cash flow difficulties, which could paralyze their operations. The inability to issue VAT invoices with allocation numbers may result in delays in payments, issues with suppliers, and even damage to the business’s reputation.
Similarities Between the Failure to Allocate VAT Invoices and the Failure to Approve Withholding Tax Rates
The new mechanism for VAT invoice allocation resembles the sanctions imposed by the Tax Authority for failing to approve a reduced withholding tax rate. For example, in the case of Li-Oz Shmash and Security Guarding Ltd. (Case No. 26743-04-21), the court ruled that the Tax Authority’s power to limit the withholding tax rate should be based on current failures, rather than historical ones. This approach should be adopted in the context of VAT invoice allocation, ensuring that decisions made by the VAT Commissioner are based on up-to-date information, not past investigations or errors.
How to Prepare for the Change
- Upgrade Accounting Systems: Businesses must ensure that their accounting systems are updated to meet the new requirements and connected directly to the Tax Authority’s system. This will ensure that requests for VAT invoice allocation numbers are processed automatically and efficiently.
- Maintaining an Accurate Business File: It is essential for businesses to maintain accurate and up-to-date reporting to the tax authorities to avoid issues with VAT invoice allocation requests. Past errors could lead to rejected requests, so businesses should keep a well-maintained and compliant business file.
- Seek Legal Advice: Consulting with an attorney specializing in tax law is crucial to navigating cases where requests are rejected or when preparing objections and appeals. An attorney can guide the business on its rights and provide assistance in situations where the Tax Authority’s decision is not satisfactory.
Summary
The new VAT invoice allocation model aims to combat the issue of fictitious invoices by strengthening reporting and monitoring mechanisms. However, it requires businesses to adapt to significant changes in their operations. To successfully navigate these changes, businesses must ensure their accounting systems are updated, their reports are accurate, and their systems are aligned with the new legal requirements. It is essential that both lawmakers and regulators take into account the practical needs of businesses to ensure that the implementation of the law does not negatively affect those operating within the law.
Yaniv Ish-Shalom & Co. Law Office specializes in tax law, offering professional guidance and legal support to businesses dealing with the Tax Authority, With extensive experience and high professional capabilities in the field of taxation, our firm provides personalized legal assistance to businesses across various industries, focusing on effective, organized, and professional solutions for addressing challenges with the Tax Authority. Contact us for professional legal advice and representation.
