Tax Appeal (Tel Aviv) 46969-05-22 Top Center of Experts Ltd. v. Tel Aviv and the Center of Value Added Tax Administration

I have before me a value-added tax appeal that concerns the question of whether the brokerage services provided by the appellant are transactions on which the tax rate is zero, in accordance with section 30(a)(8)(g) of the Value Added Tax Law, 5735-1975 (hereinafter: the "Law" or the "VAT Law").

Background in the summary and main points of the appeal

1. The appellant is a company that has been engaged in the field of medical tourism since 2010. The appellant communicates with foreign residents who are interested in receiving medical treatment in Israel, including in the framework of hospitalization, and accompanies them in all matters related thereto.
2. The appellant's income derives from the mediation between the service providers and the medical tourists. The brokerage fees are received by the appellant in one of two ways of communication: first, the tourist transfers to the appellant all the payments for the services he will receive in Israel, and the appellant pays the hospitals, doctors and other service providers the payments minus its own commission for its activity (a fee referred to by the parties as a "gross fee").  Second, the medical tourist pays directly to the hospital for the medical services, and the hospital transfers to the appellant a commission at a certain rate of the payment (a fee referred to by the parties as "net commission").
3. Section 30(a)(8)(g) of the Tax Appeals Law states that "the hospitalization of a tourist in a registered hospital under the Public Health Ordinance, 1940, and other services provided in connection with such hospitalization" will be subject to zero tax appeals. In other words, for the hospitalization services of a tourist in a registered hospital and additional services incidental to such hospitalization, no transaction tax should be paid (while input tax can be deducted).
4. In 2010, the appellant applied to the respondent to receive confirmation that her income would be taxed at a zero rate. The Respondent confirmed that the Appellant's income in respect of hospitalization services and incidental hospitalization for medical tourists will be taxed at a zero rate in accordance with section 30(a)(8)(g) of the Law (hereinafter: "Rowling 2010").
5. In 2015 and 2016, the Respondent published three non-agreement taxation decisions relating to medical tourism companies and medical service providers (Tax Decisions Nos. 6385/15, 4358/16 and 7369/16, Appendix 5 to the Respondent's affidavit). Hereinafter: "Taxation Decisions 2015 and 2016").  In the 2015 and 2016 tax decisions, the Respondent determined that the services to which zero tax will be applied in accordance with the provisions  of Section 30(a)(8)(g) of the Law, will be only services that were included in the tax invoice or receipt issued by the hospital to the tourist (net fee).  On the other hand, services that were not included in the tax invoice or receipt issued by the hospital (gross fee) will be taxed at the full rate, even if they meet the conditions  of section 30(a)(8)(g) of the law.
6. In other words, in accordance with the 2015 and 2016 tax decisions, in addition to compliance with the conditions of the law, the method of payment also determines whether a tax appeal applies at zero rate to a commission received in respect of hospitalization services and incidental hospitalization given to a tourist in a hospital – if the fee was paid directly from the medical tourist to the appellant, a tax appeal at the full rate will apply; And if it was paid through the hospital, there will be zero tax appeals.
7. The respondent issued an assessment to the appellant on the basis of the 2015 and 2016 tax decisions. In the assessment it was determined that commissions paid directly to the appellant from the medical tourists (gross fee) were subject to a full tax rate, and the appellant was taxed in the amount of NIS 17,639,039 (tax principal) due to all the gross fees paid to her.  This is without examining the nature of the treatment given in connection with those fees.
8. The appellant objected to the assessment. The respondent rejected the objection and the appellant filed the appeal with the court on May 22, 2022.  Following the filing of the appeal, on November 17, 2022, the Respondent issued an updated tax decision, which was not published at the time, in relation to the subject matter (Appendix 7 to the Appellant's affidavit, hereinafter: "Taxation Decision 2022").  In the 2022 tax decision, the respondent retracted the 2015 and 2016 tax decisions, and ruled that due to a commission received by a medical tourism company for the provision of brokerage services by it, both by direct payment from the medical tourist (gross fee) and indirectly by the hospital (net fee), a tax appeal will apply at a zero rate.  This, of course, is when the other conditions set out in section 30(a)(8)(g) of the Law apply.
9. The Ottoman Settlement [Old Version] 1916Following the 2022 Taxation Decision, the Respondent requested, with the consent of the Appellant, to amend the decision in the objection and reduce the tax liability. The court granted the agreed request.  After a number of calculations were sent to the Appellant and two hearings were held between the parties, on August 29, 2023, the Respondent amended the decision in the objection, and the tax liability was reduced from the sum of NIS 17,639,039 (tax principal) to the sum of NIS 5,663,123 (tax fund) (hereinafter: the "Amended Decision").  It should be noted that in paragraph 19 of the Respondent's affidavit, the Respondent noted that there was room to deduct from the tax the transaction tax that the Appellant actually paid for its transactions on the relevant dates, and he attached an amended calculation according to which the tax charge amounts to the sum of NIS 5,138,140 (Appendix 9 to the Respondent's affidavit).
10. 12-34-56-78 Chekhov v. State of Israel, P.D. 51 (2)The transaction tax in the amended decision is calculated on the basis of the input tax deducted by the appellant following payments to various service providers, such as hospitals, doctors, transporters, etc. The respondent's basic assumption is that if the medical service provider issued a taxable invoice for the service provided to the medical tourist, then the transaction does not confer a right to tax at a zero rate.  Hence, even the transaction between the medical tourist and the appellant, which is derived from the medical service provided to the medical tourist, does not entitle to the tax benefit.  On the basis of the input tax demanded by the appellant for the deduction and on the basis of its financial statements, the respondent calculated the relative portion of the appellant's transactions that did not entitle it to the tax benefit.
11. The respondent's method of calculation in the amended decision was as follows:

First,  the respondent calculated the total inputs for which the appellant demanded input tax with a deduction.  Subsequently, the respondent examined the relative portion of the total "cost of income" (inputs) that the appellant reported in its reports.  The data obtained taught the respondent about the ratio between the appellant's inputs that were used for taxable transactions, and its inputs that were used for tax transactions at zero.  After the respondent found the ratio between the debtor and the exemption (zero rate tax), the respondent applied the same ratio to the gross profit according  to the appellant's financial statements, deducting the transactions that were initially reported as taxable at the full rate.  The result obtained reflects, in the respondent's view, the total of the appellant's transactions that she should have reported as liable at a full tax rate – NIS 35,362,496, with the tax in respect of these transactions being NIS 5,138,140.

12. In its summaries, the respondent demonstrated its method of calculation for 2018: the input tax deducted by the appellant in that year for hospital payments, transportation, medical equipment and medical services was in the sum of NIS 1,622,703. Therefore, the total inputs paid by the appellant is NIS 9,545,309 (NIS 0.17 / NIS 1,622,703).  According to the respondent, as aforesaid, these inputs were used for taxable transactions, which otherwise would have issued the appellant an invoice at a zero tax rate.

Copied from NevoThe financial report for 2018 shows that the "cost of revenues" (inputs) in that year was NIS 22,726,070.  Hence, the rate of six inputsused for taxable transactions out of the cost of income is 42% (NIS 22,726,070 / NIS 9,545,309 ).