The ITA Unveils Updated E-invoicing Technical Specifications

On 18 July 2024, Israel’s Tax Authority (ITA) introduced an updated version of its technical specifications for its electronic invoicing mandate. This new version details the clearance Continuous Transaction Control (CTC) model that taxpayers must adhere to claim VAT deductions on cleared invoices.

According to these revised technical specifications, taxpayers must adopt the new guidelines by January 1, 2025. This deadline marks the end of the pilot period, after which the ITA will start enforcing technical validations on all received JSON files.

The key changes in the new specifications include:

·        New JSON File Lines: The JSON file format for clearing tax invoices has been enhanced with additional lines and updated validations for specific lines.

·        Updated and New Web Services: The ITA has rolled out new web services to address scenarios where an Allocation Number is not provided during the clearance process. There will be four different methods available to manage this situation.

·        New Document Types: Two new document types now necessitate an Allocation Number:

o   Agent Tax Invoice (חשבונית מס סוכן)

o   Journal Command (פקודת יומן)

These changes are aimed at improving the efficiency and accuracy of the e-invoicing process, ensuring that all transactions are properly documented and validated.

Israel has a particular problem with fraudulent invoices, used for unlawfully claiming deductions against VAT due and the ITA aims to eliminate fraud that stems from these fraudulent invoices.

Background of e-invoicing in Israel

Electronic invoicing is not a new concept in Israel. The first discussions regarding the implementation of electronic invoicing took place already back in 2020. In an attempt to combat VAT fraud, especially the rise of fictitious and other fraudulent invoices in Israel, the Israel Tax Authority (ITA) planned the implementation of mandatory e-invoicing, similar to the model applied in Chile.

According to the Clearance model designed by the ITA, VAT-registered businesses in Israel must submit tax invoice data on a transactional level to the ITA in real time to obtain a so-called “allocation number” before sending the invoice to the recipient. Once the allocation number (clearance proof) has been obtained it must be placed on the tax invoice and only then can the invoice be exchanged between the trading parties.

After a lot of back and forth, the implementation was finally approved on 24 February 2023, when the Government of Israel approved the 2023-2024 state budget and economic plan. This plan outlined the introduction of a clearance-based model into the tax system.

The final plan regarding the implementation of e-invoicing was announced on 14 May 2023.

According to the approved plan, initially planned to be implemented on 1 January 2024, the ITA will assign a confirmation number to an invoice at the time of issuance. This requirement is planned to be phased in, starting with transactions with values over NIS 25.000.

As implementation progresses, the threshold will be gradually reduced as follows:

·        2025: The threshold will be reduced to 20,000 NIS pre-VAT. Note that the Finance Committee may extend the pilot program through 2025.

·        2026: The threshold will further decrease to 15,000 NIS pre-VAT.

·        2027: The threshold will be 10,000 NIS pre-VAT.

·        2028: The threshold will be set at 5,000 NIS pre-VAT.

All B2B transactions that exceed the invoice threshold would be subject to this requirement. During the pilot phase, invoices could only be rejected by the ITA in the case of technical errors.

In July 2023, the ITA released the technical specifications for the planned e-invoicing and CTC mandate. However, later that year, in October 2023, the ITA announced a delay in implementing the e-invoicing mandate until April 2024.

Then again, on 26 February 2024, the ITA announced a further postponement of the rollout of the continuous transactions controls (CTC) mandate until 5 May 2024.

This meant that invoice recipients were still able to deduct VAT even for invoices without such an allocation number issued by SHAAM (The Data processing unit of the ITA)

The implementation aims to eliminate fraudulent invoices, and the VAT fraud associated with that in Israel.

ITA’s battle against fraudulent invoices

In Israel, fraudulent tax invoices are a prevalent, yet illegal method used to evade tax payments to the Israel Tax Authority (ITA). The ITA has identified three distinct types of fraudulent tax invoices:

·        Fictitious Invoice: This is the classic form of a fictitious invoice, which does not represent any actual transaction or service. Essentially, it is an invoice with no real basis, created solely to inflate the expenses and input tax of the recipient.

·        Inflated Invoice: This type of invoice does reflect a genuine transaction between the involved parties, but the amount stated is higher than the actual transaction value. This inflation is done to increase the deductible input tax.

·        Foreign Invoice: This invoice represents a legitimate transaction but is not issued by the contractor or service provider who actually performed the work. Instead, it is issued by a third party, misleading the tax authorities.

The Israel VAT system is based on the principle of receipt, which means the receipt between the payment of transaction tax and the deduction of input tax. Only a valid tax invoice, issued legally, can reflect the principle of receipt and help the tax collection system. In the case of fraudulent invoices, this phenomenon sabotages the principle of receipt and violates it.

The implementation of mandated e-invoicing aims at eliminating the occurrence of fraudulent invoices in Israel. The obligation to approve invoices by the tax authority is a significant change in the VAT law, which is expected to lead to a reduction in the use of fictitious and other fraudulent invoices and improve the transparency and credibility of the tax market in Israel.

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