Tax Appeal (Tel Aviv) 46969-05-22 Top Center of Experts Ltd. v. Tel Aviv and the Center of Value Added Tax Administration - part 2

The reported gross profit of the appellant in 2018 is NIS 21,891,886.  The appellant reported and paid transaction tax in respect of transactions in the amount of NIS 2,296,860.  Accordingly, the gross profit of transactions for which no tax was paid is NIS 19,595,026 (NIS 2,296,860 - NIS 21,891,886).  The respondent applied the ratio found between the taxable portion and the non-taxable portion on the transactions for which no tax was paid (42% * 19,595,026 NIS), and the result was the total number of transactions that the appellant had to report as fully taxable – NIS 8,230,221, for which the tax is NIS 1,195,844.

13. The appellant denies the very issuance of the amended decision in the objection and the method of calculation of the respondent, and hence this appeal.

The Appellant's arguments in summary

14. The respondent's decision in the amended assessment is null and void, in view of the fact that it was the issuance of an input assessment in the framework of a decision to appeal a transaction assessment.
15. The respondent's determination of the amended assessment is completely different from the original assessment. This case requires a two-stage proceeding in which the respondent would have issued a new assessment, in respect of which the appellant could have filed a new objection, and a hearing would have been held on the new objection.  The corrected assessment is like a new mole, and the person who removed it cannot decide to appeal it.  The receipt of the amended assessment nullifies the provisions of section 82 of the Law.
16. It is not possible to discuss the 2022 tax decision in the framework of the decision to appeal the amended assessment, since it includes concepts and interpretations that have not yet been implemented. This is especially so when the 2022 tax decision has not been published to the general public engaged in the field.  This is the first implementation of the respondent's position, and there was room for a detailed and reasoned assessment that includes the basis for the tax charge, while clarifying all the terms relating to it.
17. The conditions for applying section 30(a)(8)(g) of the law are based on circumstances relating to the tourist, the place of hospitalization, and the services provided to the tourist. This is regardless of whether the parties report the transaction as subject to VAT.  The liability in a tax appeal is determined according to the provisions of the law and not according to the conduct or decisions of the parties.  The Respondent acted contrary to this, and where a tax invoice was issued that included tax at full rate, even if it relates to the services included in section 30(a)(8)(g) of the Law, the Respondent determined that the transaction would be taxable at the full rate.
18. Where the respondent wishes to rely on the reports of one dealer for the purpose of determining the scope of the tax liability of another dealer, it should check that that dealer is implementing the provisions of the law. The respondent did not examine this and established a presumption that if the service providers issued a tax invoice at the full rate, they would know that the transaction is taxable at the full rate.  Moreover, in the absence of dialogue with the service providers, until February 2025, when the 2022 tax decision was published, they could not have known about the cancellation of the 2015 and 2016 tax decisions, and they issued the invoices at a full tax rate in accordance with those tax decisions.
19. The appellant is indifferent to the issuance of a tax invoice at full rate by the hospital or the medical service provider, since the appellant is entitled to deduct the input tax, in view of the provisions of section 30(b) of the Law. The result from the appellant's point of view is the same, whether the invoice was issued at a zero rate or at a full rate.  There is no basis for the respondent's demand that hundreds or thousands of suppliers be contacted to amend the invoices.
20. Throughout the assessment period, the Appellant acted in accordance with the Rolling 2010 Rules, and the Appellant's reports were even examined by the Respondent on an ongoing basis, in view of checks for the return of the returns in the periodic reports it submitted, and in an in-depth audit conducted for the Appellant during 2018. The respondent created a clear and clear reliance on the appellant.  The Respondent seeks to nullify the 2010 ruling retroactively, by applying the 2022 Taxation Decision.
21. With regard to the respondent's claim that the appellant did not present evidence according to which hospitalization services were provided to tourists, it should be clarified that the crux of the dispute at the beginning of the proceeding was whether a tax would be levied at the full rate on the gross fee, regardless of the nature of the service provided and the question of whether the fee was paid to it in connection with the tourist's hospitalization.  Similarly, the first objection proceeding focused entirely on the question of the fundamental liability in a tax appeal in light of the 2015 and 2016 tax decisions.  At no stage during the assessment hearing, did the respondent raise before the appellant an argument that a commission received in a particular transaction was given not in connection with the hospitalization of a tourist.
22. During the amended decision in the objection, no discussion was held at all, and the respondent sent the appellant a number of calculations, all of which are based on the input tax deducted by the appellant. The respondent ruled sweepingly that since the service providers issued the appellant tax invoices that included tax at the full rate, it was not a matter of services incidental to the hospitalization of the tourist.
23. The respondent was presented with considerable evidence relating to the appellant's activity, including the services provided to tourists, as part of the audit prior to the issuance of the first assessment. In addition, already during the audit conducted in 2018, the respondent's representatives were given full access to the patients' files, including medical reports, hospitalization reports, and invoices.  After reviewing the files, the auditors found no fault in the appellant's conduct, and thus the audits ended without issuing an assessment.  In the absence of a procedure whereby upon completion of an audit, a letter will be delivered to the dealer to this effect, the appellant has no reference on the matter, but the matter speaks for itself.
24. The determination of the price of the Appellant's transactions by the Respondent was done in contravention of the provisions of the Law. In addition, the respondent must subtract the transportation from the calculation.  The transportation of a tourist is taxable at a zero rate in accordance with the provisions of section 30(a)(8)(b)(2) of the law, and in accordance with the Supreme Court's ruling regarding the transportation of tourists from the airport to the hotel and back.
25. In the present case, since the gross fee was not agreed upon between the tourist and the appellant, the provisions of section 10 of the Law will apply with regard to the determination of the fee. The default is the market price of the appellant's services, and in the absence of this, the industry's customary profit is added to the cost of the services.  The Respondent has a clear picture regarding the customary profit rate in the industry, or the price of the commission.
26. The respondent chose to ignore the provisions of the law regarding the determination of the price, and set a profit of its own. In addition, the profit determined by the respondent should have been close to the customary profit in the industry.  The Respondent should also have taken into account expenses that are not classified in the cost of the sale, but which have a direct and clear connection to the business activity.  The costs of translating the documents and the sales agents who distribute the appellant's services in Israel and abroad are inherently connected to the provision of the services.  To these must also be added the cost of renting offices and clinics and the cost of employees who are directly and clearly engaged in services to tourists.  In this regard, it is clarified that all such expenses, except for those for 2020, were approved by the tax assessor as part of final assessments.
27. The Appellant submitted summaries of its response in which it reiterated what was stated in its summaries, emphasizing the impact of the 2015 and 2016 tax decisions on the issuance of full tax invoices to the Appellant by the service providers; her reasons for not submitting the evidence; and its claims that this is an assessment of inputs.

The Respondent's Arguments in Summary

28. The appellant has the burden of proving that in each and every one of its transactions the conditions set forth in the law are met in order to receive the entitlement to the tax benefit. However, the appellant did not prove that the transactions underlying the assessment in the appeal did indeed meet the conditions of the tax benefit.  The entitlement to the tax benefit is a clear factual question, and in order to clarify it, the appellant should have presented documentation of the medical service provided to the medical tourist.
29. All along the way, the appellant avoids explaining the gap between the reports of the medical service providers at the full tax rate, and its own reports at the zero tax rate.
30. 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 the tax benefit. 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.  It is inconceivable that the dealer who actually provides the medical services would report to the respondent a taxable transaction, and pay tax in respect thereof; However, the appellant, who is engaged only in brokerage, will report the same service at a zero tax rate.  In other words, the main thing, the medical service, will be taxable; While the dealer, the brokerage service, will be taxed at a zero rate.
31. The appellant took the law into its own hands and deducted input tax for medical services that were provided to the medical tourist and for which tax was paid. At the same time, she reported a deal with the medical tourist at zero tax.  This conduct of the appellant deducted from the public coffers considerable sums that were supposed to be paid by the medical tourist to the State Treasury as a final tax, and instead made their way into the pocket of the appellant, who enjoyed an input tax refund, but did not collect transaction tax.
32. The appellant argues that the medical service providers' reports of taxable transactions are incorrect. However, the appellant did not bother to amend the reports of the medical service providers, nor did it prove that this was a medical service that constituted a transaction at a zero tax rate.
33. On the basis of the input tax demanded by the appellant for the deduction and on the basis of its financial statements, the respondent learned the relative part of the appellant's transactions that does not entitle it to the tax benefit. The relative portion of the appellant's taxable transactions is at the basis of the calculation made by the respondent in the amended assessment.
34. The appellant did not present an alternative to the assessment conducted by the respondent. The appellant ignores the unreasonableness in its reports and does not deal with the amended assessment, but rather prefers to point out flaws in the respondent's conduct.
35. Appendix 17 to the appellant's affidavit is the admission of a party that no tax was paid in respect of taxable transactions. The transactions that were reported to the Respondent as taxable are lower than the cost of the transactions marked in the Appendix as taxable.  This is when the cost of the transactions must be added to the price of the brokerage services that were also included in the transactions.
36. The appellant expanded the front in its summaries and presented baseless facts that were not proven.
37. The implementation of Rowling 2010 will not bring about a change in the assessment. The updated tax decision from 2022 is essentially similar to Rowling 2010.  Rowling 2010 also stipulates that a zero-rate tax will apply only to services provided by hospitalization.  Rowling 2010 did not permit the appellant to deduct inputs in respect of taxable medical services, and at the same time to report a transaction that is taxable at a zero rate, in respect of that service.
38. The respondent did not issue a new assessment. The Respondent left in place its decision regarding the assessment of the transactions, and amended the amount of the charge in accordance with the new taxation decision.
39. The assessment is lenient with the appellant, since the input tax deducted by the appellant in respect of medical services provided to the medical tourists exceeds the transaction tax that was charged in the assessment. However, in the circumstances that have arisen and in light of the changes in the respondent's position, it is not correct and proper to intervene in the assessment once again and to be stringent with the appellant.
40. The appellant claims that the assessment was amended unlawfully and she was not given an opportunity to argue her claims. However, discussions were held between the parties after the 2022 tax decision, and the appellant even filed an amended statement of claims.  In these circumstances, it cannot be argued that the appellant was deprived of the right to plead.
41. The respondent did not seek to intervene in the price of the transaction, but rather in the tax rate deriving from it. This is based on the appellant's reports.

Discussion

42. I will preface by stating that I am of the opinion that the appeal should be dismissed, with a certain reduction from the amount determined in the amended decision in the objection, which was updated during the hearing of the appeal.
43. With regard to the appellant's preliminary arguments with respect to the very issuance of the amended assessment by the respondent, I am of the opinion that they have no substance.
44. In the application dated March 14, 2023, the appellant agreed to return the proceeding to the objection stage, an agreement that reduced the tax liability by approximately NIS 12 million.  After the proceeding was returned to the objection stage, two hearings were held with the appellant's participation, on June 20, 2023 and August 10, 2023 (Appendices 10 and 12 to the Appellant's affidavit).  After the amended decision in the objection was rendered, the appellant filed an amended statement of appeal, in which she laid out her arguments in relation to the amended decision in the objection.  As part of the appeal process, the appellant submitted evidence before the court and she was not limited in her arguments.
45. It can therefore be seen that the procedure for amending the assessment was carried out with the consent of the appellant, while she was given the right to plead before both the respondent and the court. I did not find that her rights were deprived in this context, and that she had ample opportunities to present her version and present   her arguments in full.  Indeed, the way forward is to hold a full two-stage assessment process, in which the updated decision was already discussed at the initial assessment stage.  Nevertheless, the appellant's rights were not violated in a manner that would lead to the cancellation of the assessment, and the appellant's case was examined and clarified before both the respondent and the court, and she was not subjected to any miscarriage of justice (Civil Appeal 5072/19 Shawarma A.S.  In the Tax Appeal v. Hadera Tax Assessor, para. 16 [Nevo] (May 9, 2021)).
46. The appellant claims that it relied on the 2010 ruling and acted in accordance with it, and therefore it is not possible to issue an assessment on the basis of the 2022 tax decision. With all due respect, it appears that the appellant did not get to the root of the respondent's claims.  The respondent's basic argument is that a significant part of the transactions carried out by the appellant do not meet the conditions of section 30(a)(8)(g) of the Law, because they were not under "hospitalization" or "incidental hospitalization", and therefore they are liable to pay transaction tax.  This is contrary to both the 2010 ruling and the 2022 tax decision.  The respondent learned about the aforesaid from the fact that the service providers themselves issued tax invoices to the appellant at full rate, and the appellant, for her part, did not report those transactions as taxable.  As stated, according to the respondent, if the transactions had been covered under  section 30(a)(8)(g) of the Law, the service providers would have issued the appellant a tax invoice at a zero rate.

00In order to identify those transactions and calculate the tax to be paid in respect of them, the respondent turned to the inputs paid to the service  providers – inputs that in his opinion represent taxable transactions – and from them he deducted the portion of the gross profit for which transaction tax is to be paid.  Therefore, the amended decision in the objection does not in essence contradict the 2010 ruling or the 2022 tax decision.  According to both the 2010 ruling and the 2022 Tax Decision, the conditions of section 30(a)(8)(g) of the law must be met in order to benefit from the tax benefit.  According to the respondent's position in the amended decision in the objection, the appellant did not meet the same conditions and for the purpose of the matter, the respondent would have issued the same assessment according to Rowling 2010 (p. 60, paras. 37-39 of the minutes of the evidentiary hearing).

47. This also collapses the appellant's argument that this is an input tax assessment.  This is not an input tax assessment, but a transaction tax assessment.  The appellant was not charged for the deduction of the inputs, but for the taxable transactions, where the data for calculating the ratio between the taxable transactions and the exemptions, the amount of the taxable transactions and the tax to be paid in respect thereof, derive from the inputs deducted by the appellant and from its own reports on the gross profit it generated.  In other words, the respondent calculated the transaction tax by calculating the profit that the appellant generated as a result of the taxable inputs.  Even if the inputs serve as the basis for charging transaction tax, this does not turn the assessment itself into an input tax assessment.
48. In light of the aforesaid, the only argument that the appellant can have is in relation to the assessment itself and the method of calculating it, and in particular, with respect to the identification of those taxable transactions according to the respondent's position – transactions in which the service provider issued the appellant an invoice at a full tax rate and the appellant charged the transaction at a zero tax rate, deducting the inputs.
49. I will admit and do not deny that my opinion is not comfortable with the way the respondent's assessment was calculated. There can be no dispute that the best way to identify the obligatory transactions that do not meet the conditions of section 30(a)(8)(g) of the Law is to examine the transactions themselves.  This is how you can reach the most accurate result.  Naturally, it is not possible to examine each and every transaction and the respondent is not expected to go through thousands of tax invoices in every audit he conducts, but the respondent is given alternative ways of examining the transactions and issuing an assessment on the basis of them.  For example, a sample examination, after which the taxpayer can try to undermine the results of the respondent's examination.  Of course,  the alternative ways should also aim to reflect the most accurate result possible of a "true tax."
50. In the present case, the examination of the inputs while relying on the respondent's "presumption" that if the medical service provider issued an invoice with a full tax charge, then the transaction is taxable, is indeed an alternative way that makes sense, but it is not the optimal way.  This is because it is not the service providers who determine whether the transaction is taxable, but rather the characteristics of the transaction itself.  The mere fact that the service provider believes that this is a transaction that is taxable at the full rate does not necessarily indicate that this is indeed the case.  If the respondent believes that any transactions do not meet the conditions of section 30(a)(8)(g) of the Law, he would have done well to conduct an audit in which he would have examined the transactions on their merits, and if he had indeed found that the transactions did not meet the conditions of the section, he would have issued an assessment accordingly.
51. It should be clarified that, as stated, there is no requirement from the respondent to examine each and every transaction out of the thousands of transactions that have been made. However, the respondent must examine a sufficient and representative quantity of transactions, from which it is possible to learn and apply to the other transactions.  The respondent's sweeping reliance solely on the inputs that were deducted, under the assumption that if the treatment provider who issued the invoice believes that the transaction is subject to transaction tax, then it is a taxable transaction, without examining even one transaction on its merits, is problematic (even if it is not fundamentally defective, since it is not an arbitrary assessment that cannot stand).  It is not impossible that a transaction reported by the service provider as a transaction that is subject to full tax, is indeed a transaction that is taxable at a zero rate.
52. The respondent also admits this:

"The witness, Mr. Hershberg: ...  First of all, it is quite possible that the service provider made a mistake , and as the witness on behalf of the appellant testified, there were cases in which they contacted the suppliers, mainly at the hospital, and asked to correct the invoice, meaning that the appellant is aware that there are cases in which an incorrect invoice was issued to her for input tax" (p. 52, paras. 26-29 of the minutes of the evidentiary hearing.  See also p. 45, paras. 12-32 of the minutes of the evidentiary hearing.  All the emphases in this judgment are mine.