Many exporters are entitled to tax refunds (customs / purchase tax) from the Tax Authority, or to a delay in import duties. Under current circumstances – when every dime is important and accounted for – exporters should realize their rights.

What is restitution? The Tax Authority explained the term on its website, and we will summarize and clarify the matter. Restitution is the process of delaying tax payments or refunding import duties (customs, purchase tax) for exporters who meet one of the following criteria:

• Exporters who import (import tax dutiable) components that are used for manufacturing goods for export.
• Exporters who purchase (purchase tax dutiable) locally manufactured components that are used for manufacturing goods for export.

The idea in general terms is that an exporter is entitled to restitution of customs and purchase tax for raw materials used to manufacture the product exported by the exporter, as explained by the Supreme Court:

“Restitution, as the name implies, is a return of what was paid. It is an arrangement of return only. The goal of restitution… is to return import taxes paid for inputs used for manufacturing products for export. The reasoning is that once a certain input was imported and then exported as a different product, there is no justification to levy import duties upon it, since at the end of the day there was no true, full import event. Therefore, at the time of export the “restitution” is granted for paid import duties. This is the goal and reasoning of the restitution arrangement. It is not meant to encourage export or subsidize exporters. Its goal is restitution and restitution alone.”

The Tax Authority added that “the act of restitution is intended to aid exporters in importing raw materials required for the manufacturing process, or purchase them in Israel without the burden of levied tax harming the profitability of the business”.

How many years may one request restitution for in retrospect? As for imported components for which customs and purchase taxes were paid, restitution may be requested for up to five years retroactively from the date of the request’s submission. With regard to locally manufactured components for which purchase tax was paid, restitution may be requested for up to three years retroactively from the date of the request’s submission.

Is the exporter now exporting the goods entitled to the restitution for paid import duties of the raw materials, or is the importer who imported the raw materials entitled to the restitution? The answer is that the exporter is entitled to the restitution. This is obviously not relevant in cases in which the exporter is also the importer of the raw materials, as it is a single entity, but is highly relevant when an exporter makes a purchase in Israel of raw materials from an importer who imported the materials and paid their import duties.

As noted above, the exporter is entitled to the restitution. But the question immediately arises – how can the exporter prove the value of the import duties paid for the raw materials used to produce the complete exported product? The answer is clear – the exporter requires the assistance of the importer for proving these values. The importer may transfer the information to the exporter (the import declarations pertaining to the import of the raw materials), or may provide the information directly to the Tax Authority if he wishes to safeguard the confidentiality of the information and not expose it to the exporter.

The restitution is implemented in two tracks:

• The restitution track – the importer pays the import duties and then receives the restitution upon the export of the completed goods (for simplicity, we are assuming the importer and exporter are a single entity).
• The delayed tax track – the importer delays payment of import duties due to the expectation that in the end of the day the raw materials will be used as part of completed product that will be exported.

Restitution and Trade Agreements – there are several Free Trade Area Agreements (FTA) that do not enable restitution of customs paid for imported raw materials, if the final product is exported with a certificate of origin. The idea behind this limitation is that these FTAs seek to promote use of local raw materials or raw materials originating from the member nations, and provide a negative incentive toward using raw materials from third countries. These FTAs include agreements with the European Union, the European Free Trade Association (EFTA) and Turkey. These restrictions apply only to customs restitution, but purchase tax restitution is possible even under these agreements.

On a procedural level, an exporter who wishes to initiate the restitution process is required to open a restitution account with the Restitution Division of the Central Customs House or the Haifa Customs House (according to the exporter’s place of residence), provide all required documents, and be prepared for a periodical audit, following which he will be entitled to receive restitution.

Restitution is returned with linkage and an annual interest of 4%, a respectable mechanism for ensuring that there is no loss of value.

Dear exporters, here’s your cash back, won’t you accept?

The content in this communication is provided for informational purposes only and is not intended to be comprehensive. It does not serve to replace professional legal advice required on a case by case basis. The firm does not undertake to update the information in this communication or its recipients about any normative, legal or other changes that may impact the subject matter of this communication.