Tour operators urge Finance Ministry to keep VAT waiver for tourists

A prominent group of tour operators has sent a letter to the Finance Ministry warning against a plan to cancel a VAT exemption on tourism services for foreign tourists in the coming state budget, saying it would significantly raise prices and harm the local industry.

Currently, tourists enjoy an exemption on the 17-percent value added tax on services such as hotel accommodation, car rental, catering, travel agency services and more.

Michael Federmann, Chairman of the Tourism Industry Coordinating Office in Israel, wrote in the letter Sunday that “canceling the VAT exemption for tourists would be a damaging and irreversible move for the Israeli tourism industry, for the Israeli economy, and for Israel’s world image.”

The organization’s members are some of the biggest tour operators in the country.

The VAT waiver removal is expected to be included in the so-called Arrangements Bill. The Arrangements Law determines how funds in the annual budget will be disbursed.

“We believe that it is not possible to make a decision on the matter without establishing a government policy on incoming tourism and without conducting an up-to-date study on the target audiences, the level of demand, the contribution of tourists, and more,” Federmann wrote.

He claimed that data on which the decision has been sourced is based on “an irrelevant study conducted between 1997-2008 and published over a decade ago in 2011.”

“Since then, the world of tourism has changed beyond recognition,” Federmann said. “This is a flawed decision-making procedure, without a factual foundation, irrelevant and unreasonable.”

Channel 12 news cited an expert opinion as estimating that if tourists are asked to pay VAT it will cause a shrinkage of up to five percent in the tourism industry, wiping more than NIS 1 billion ($280,674,200) from the economy.

Tax specialist attorney Ayelet Yitzhaki told Channel 12 that charging VAT could also harm Israeli tourist businesses abroad, as the current zero tax rule was met with reciprocity in some countries that likewise exempted Israeli operators from VAT. Should Israel drop its exemption, other countries may do the same for Israeli companies, driving up their expenses, she warned.

Israel’s tourism industry is still recovering from the devastating consequences of the two-year coronavirus pandemic that started in 2020 and which saw entry into the country halted for lengthy periods, with hotels and tourism sites closed for months on end.