Soon: The Tax Authority wants to impose VAT on currency conversion fee for credit cards

The use of credit cards abroad will soon be added to the list of products that are becoming more expensive in Israeli life: a six-year dispute between the credit card companies and the tax authority may soon end in a compromise, the consequences of which could make the fees for using credit cards abroad more expensive.
In December 2016, the Tax Authority issued an assessment to the credit card companies that mainly deals with the payment of VAT for income from credit card transactions carried out abroad, as well as online purchases on websites abroad. When a customer carries out such transactions, he pays a foreign exchange conversion fee for them in the amount of 2.5 %–3%. In addition to this, the credit card company receives income (the cross fee) from the entity that cleared the transaction for the business.
These revenues have been exempt from VAT until today, because they are made outside the country's borders. However, the Tax Authority considers them as income that must be charged 17% VAT, because it is made by an Israeli customer who receives service through an Israeli credit card company. The Tax Authority wants to impose VAT on the foreign currency conversion fee with credit cards, similar to the fact that if the customer were to exchange cash in Israel, VAT would be imposed on the transaction. The companies' exposure to the assessment required by the Tax Authority is not eliminated, and it amounts cumulatively to over NIS 700 million, starting in 2012. Initially, the companies reasoned with the tax authority why it was not justified to impose the tax, but their claims were not only rejected, but their assessment has since inflated. The companies decided to resort to legal proceedings and appealed to the court. Court hearings were held in recent months, but At the same time, the companies conducted negotiations to formulate a compromise with the Tax Authority. In July, the parties informed the court that the negotiations were progressing, and it was agreed that by the end of the month (that is, next Wednesday) the court would be informed of the status of the compromise.
The settlement, assuming that it will indeed be drawn up, should include the amount of the assessment for the previous years, but the more essential meaning is that starting from the drawing up of the settlement, VAT will be imposed on the conversion fees, which will translate into an increase in the fees.
According to estimates, this is a tax amounting to tens of millions of shekels per year for the VAT on the conversion fee. The credit card companies will indeed absorb the VAT payment for the previous years, but looking ahead, they are expected to pass this on to the customers, even though at their current level of profitability, They can absorb at least part of the amount. Already today, using a credit card abroad is considered expensive due to the currency conversion, and now it may become more expensive to a considerable extent. For example, if the currency conversion fee is 3%, and assuming that the VAT will be fully passed on to the customer, then the fee may reach 3.5%.
The use of credit cards abroad is only gaining momentum, following the exit from the Corona crisis and the full opening of the skies in the last year. The reports of the credit card companies show that the volume of income from transactions carried out abroad more than doubled in the first half of 2022 to the level of NIS 194 million , when in all of 2021 the scope of these revenues was NIS 260 million.
The companies' exposure to the issue is not negligible: Cal stated in its reports that the amount of its exposure for which provisions were not made is NIS 195 million, at the maximum the amount of the required assessment is NIS 232 million, when a provision was made for part of the amount. Israchert stated that the amount of its exposure is NIS 324 million shekels, and last June she made a provision of 25 million shekels in her reports. Isracard, now a public company without a controlling interest, was until 3.5 years ago under the control of Bank Hapoalim, which is also the major distributor of its card. In its reports, the company states that the bank has announced that it will pay the VAT on overseas commissions for its customers in a compromise that will be drawn up.
Although the exposure of the companies amounts to hundreds of millions of shekels, it is quite possible that in the end the amount they will pay will be significantly lower than the initial calculation of the amount demanded by the tax authority. It is not yet clear whether a compromise will indeed be formulated and what the scope of the payment will be, but one thing is almost certain - the blanket exemption from VAT for using credit cards abroad will not last long, and those who will bear the tax will be mainly the customers.