Affiliates Tax Issues - Yair Binyamini - Affilicon Fall 2008

05/03/23

Affilicon 2008:

Israeli and International Tax Aspects of Affiliate Marketing

Yair Benjamini, Adv. Yigal Arnon & Co. Law Offices

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Should Tax be paid on Affiliate Marketing Profits?

• Income Tax is paid on any business profits of an Israeli resident individual or Company

• Value Added Tax is paid by any business operating in Israel

• Is Affiliate Marketing a business?

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Common Questions

1. If I receive payments in a foreign bank account, are they subject to tax in Israel?

2. If I keep the funds in Paypal, will they be subject to tax even if I don’t withdraw them?

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Enforcing the Payment of Tax on Online Profits

• The US and the UK classify Affiliate Marketing as a Business Activity.

• The US Experience – – Ebay imposes Withholding Taxes. – Google Adsense Withholding Taxes. – Ebay Seller lists provided to IRS.

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The Invasion of the Robots

• In 2006 the UK tax authorities announced that they were using a “tax robot” to locate VATable suppliers operating on eBay.

• In August 2007 Swedish Skattemyndigheten (tax authorities) clamped down on the Internet affiliate industry through the use of a software program called ECEyes.

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Expenses and Utilization of Losses• An Unregistered Business, which does not duly keep accounting books, may not utilize losses for income tax purposes (carry forward and lateral offsetting).

• For VAT purposes – a business granting services solely to foreign residents can receive VAT returns.

• Who is the recipient of the Service ? Is the Dealer eligible for Zero-rated VAT?

VAT Offset and Losses

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Common Affiliate Models

Rev Share

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Common Affiliate Models

CPA

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Timing of Losses Vs. Profits

• Initial Investment (e.g. PPC) is possible, however the timing of the profits corresponds with the expenses.

• The profits may accrue during several tax years after the investment is made.

Rev Share

CPA

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Corporate Taxation

• A corporation will be subject to tax in Israel, if:– It was incorporated in Israel; or– It is Controlled and Managed in Israel;

Therefore, a Foreign Corporation will be subject to tax in Israel if it is Controlled and Managed in Israel

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Control and Management

1) Company must not be controlled and managed in Israel

2) Controlling and managing a Foreign Country from Israel without paying tax in Israel is a criminal offence

3) Control and management can be exercised anywhere outside of Israel and not only in Country of Incorporation.

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Control and Management

• Main tests for determining “control and management”: – Place of the Board of Directors. – Place of Strategic Decision Making. – Level of decision making carried out in Israel. – Additional circumstances

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Recommendations for Foreign Companies

Foreign Partner or Partners.

Allows foreign Control and Management

Saves Tax at a Corporate Level – defers tax on disbursements.

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Disclosure to Authorities

• Anyone holding an interest in a foreign corporation must file a tax return.

• If the Corporation is in a “tax haven” (where tax is lower than 20%) must file a special report.

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Withholding Obligations

• An Israeli Resident Company – whether incorporated in Israel or Controlled and Managed in Israel, has withholding obligations for Income Tax Purposes.

• Some US companies demand a W-8 form from foreign affiliates or affiliate companies.

• Unfortunately, Israel does not have such a simple procedure.

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Thank you for your patience!

For further information contact Yair Benjamini at Yigal Arnon & co.

yairb@arnon.co.il03-608-7850