Israeli customs is demanding duty on shipments that cleared three years ago. Can they go back that far?

A customs file that closed cleanly at the port is not closed for tax purposes. Israel values imports on the transaction value method, adopted by the Customs Ordinance Amendment Law of 1997 to implement the WTO Valuation Agreement and in force since 1 January 1998, and the Customs Division of the Israel Tax Authority audits those declarations long after the container has been unpacked. The reopening power comes from a separate statute, and it runs for five years.

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Detailed Answer

The demand is issued under the Indirect Taxes (Overpaid or Underpaid Tax) Law 5728-1968. That Law defines a shortfall as indirect tax that was not paid, or was refunded in error, in whole or in part, and defines indirect tax to include customs, levy, purchase tax and stamp duty. Section 1 fixes what it calls the determining period at five years for imported goods, counted from the day the shortfall arose, against three years for other goods. Section 2(a) obliges the taxpayer to pay a shortfall demanded within that period. Section 2(b) then goes further, and allows the Director to reach back beyond five years where he shows either that the shortfall arose from incorrect information the taxpayer gave or failed to give, without the taxpayer proving good faith, or that the taxpayer knew or ought to have known of it. Section 3 is the defence, and it is cumulative: the shortfall must not have arisen from information the taxpayer supplied, the taxpayer must not have known and could not reasonably have known of it, and the goods must have been sold in good faith at a price that did not include the tax. Miss any limb and the defence goes.

The valuation points that generate these demands are familiar to any British exporter who has ever dealt with HMRC on the same subject, and the answers are not always the same. Royalties and licence fees the Israeli buyer pays as a condition of sale, tooling and design supplied free of charge, and commissions other than buying commissions all belong in the customs value even though they never appear on the commercial invoice. Where the UK company and the Israeli importer are related, the declared price is examined against the relationship, and a transfer price accepted by HMRC for corporation tax is not automatically accepted by Israeli customs for duty. That mismatch is the single most common trigger. Practically, a supplier in Manchester feels this indirectly: the demand lands on the Israeli importer or on the UK group's Israeli subsidiary, the importer asks for historic pricing files going back five years, and the answer to whether the Section 3 defence is available turns on documents sitting in a UK finance department. Getting those files organised early matters more than the legal argument, and the same evidential discipline applies to the origin side of the file, covered in our answer on proving EU or UK origin for goods entering Israel.

In Practice: Under Section 1 of the Indirect Taxes (Overpaid or Underpaid Tax) Law 5728-1968 the determining period for imported goods is five years from the day the shortfall arose, Section 2(a) obliges payment on a demand inside it, Section 2(b) extends it where the importer supplied the incorrect information, and the Section 3 defence needs all three of its limbs. The demand comes from the Customs Division of the Israel Tax Authority. On a NIS 2,000,000 understatement of transaction value, VAT at 18% alone adds NIS 360,000 before duty, linkage and interest, and an administrative objection to the customs house is normally answered within 60 to 90 days, with an appeal to the Magistrates Court running 12 to 24 months.

When to Consult a Lawyer

• The demand covers related party sales between the UK parent and its Israeli subsidiary. Israeli customs tests the price against the relationship under the valuation rules, and the transfer pricing study prepared for HMRC will not answer that question on its own.
• Royalties, tooling or free of charge design work moved between the two companies. These are the classic additions to customs value, and their omission is treated as information the importer supplied, which closes off the Section 3 defence.
• The demand reaches back more than five years. That is only lawful under Section 2(b), and whether the Director can carry his burden on knowledge or on incorrect information is a genuine fight worth having before anything is paid.

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Speak With an Israeli Attorney

We review the demand against the determining period, assemble the valuation file with your UK finance team, and run the objection and any appeal against the Customs Division on your behalf.

Contact us for a confidential initial consultation.