Real-time VAT reform has not yet matured into legislation but is already causing a storm in the economy

The "immediate VAT payment" reform, unveiled this week by Tax Authority Director Shay Aharonovich, has not yet matured into legislation but is already causing a storm and objections among tax experts and business representatives who claim that it will negatively affect companies and businesses in the economy and lead to the passing of the move's costs onto the consumer.

At the head of the opponents is the Institute of Certified Public Accountants. The President of the Institute of Certified Public Accountants, CPA Chen Schreiber, sent a letter this week to the Tax Authority Director in which he clarified that the Institute opposes the implementation of the proposed move.

The planned reform was born as part of the fight against fictitious invoices, which drain billions of shekels a year from the state treasury. In its framework, the economy will move to online and immediate VAT reporting and payment when transactions are executed.

According to the new model, every invoice will be transmitted automatically directly to the Tax Authority, and the VAT for the transaction will be paid at that same moment, based on systems known from the "Israel Invoices" project. The process will be carried out directly through the invoicing system built into the business's accounting software, or alternatively through digital cash registers that will interface directly and in real-time with the Tax Authority's systems.

This is a sweeping transition of tax liability for businesses to an absolute cash basis, meaning VAT payment and reporting only at the time of receiving payment — and not at the time of executing the transaction (the time of delivering the product or providing the service), as the law requires today.

Although the emerging reform is supposed to be included within the framework of tax plans in the next Arrangements Law for 2027, in parallel with the approval of the state budget towards the end of December 2026 or the beginning of 2027, and it is not yet known what will be adopted and pass the legislative stages — the criticism has already begun.

Fundamental change of the rules of the game

According to Adv. Rani Schwartz, managing partner at the Yaron Eldar Peller Schwartz & Co. firm: "VAT payment on an immediate basis creates a cash flow hole for businesses. Today, when a business receives the VAT payment into its account, it has a certain 'safety cushion' in that it transfers the VAT to the state only on the 15th of the following month and sometimes two months later. Such a change is a fundamental change of the rules of the game."

Schwartz adds that "a question that is very important to ask here is — will input tax deduction also be immediate? At the moment, it is unclear how immediate collection will provide an immediate answer to the firm's value added that does not constitute the full VAT in the transaction. That is, when a dealer is liable for VAT, their value added is not the full 18% in the transaction, but a parallel mechanism of immediate input offsetting must be created.

"In addition, when a dealer expects a VAT refund, for example in an investment that also involves VAT payment (for example, real estate for a business), today it sometimes takes a long time until they receive a refund for this from the Tax Authority. Therefore, will there be an immediate input refund in parallel with the immediate collection of VAT, or is it that when it comes to a refund, they check first and then refund?".

Fear that tax considerations will affect commercial decisions

According to the President of the Institute of Certified Public Accountants, Schreiber, the planned reform may have a negative impact on business conduct. "As long as the date of VAT liability depends on the date of receiving the consideration, this may have an impact on credit terms and on the date of making payments between businesses.

"There is a fear that tax considerations will affect commercial decisions and transaction terms, in a way that does not stem from the parties' economic considerations," he wrote in an appeal to the Tax Authority Director and added that the negative impact might be reflected especially in small businesses. "It is required to examine in particular the implications of the model for small and medium-sized businesses, which are more sensitive to cash flow and credit terms," he wrote.

CPA Schreiber also claims that a model based on receiving consideration will lead to transactions with similar economic characteristics receiving different tax treatment just because of the method or date of payment. "We warn of the possibility that the new model will create incentives for advancing or delaying payments for tax reasons," he wrote.

Also, according to the President of the Institute of Certified Public Accountants, "the proposed model grants the Tax Authority excessively and indiscriminately broad and detailed information about businesses in the economy, including transaction volumes, identities of parties to the transaction, prices, and payment dates, and this must not be allowed."

In his view, alongside the benefit of information for enforcement purposes, it is mandatory to define in advance the purposes of its use and its boundaries, in a way that will ensure proportionate and focused use of the collected information.

Schreiber also warns that the planned reform may directly affect the cost of living. "We predict that the reduction of bureaucracy at the Tax Authority level will translate into an increase in compliance costs for businesses, which will eventually be passed on to the consumer as well," says Schreiber.