Media Centre

Broad Reforms concerning Fuel Taxation and Recognizing Fuel Expenditures

19 September 2021

Dear friends and colleagues,

We wanted to bring to your attention a series of draft orders and regulations relating to taxation in the fuel sector which were published recently for public comment ahead of discussions in the Knesset Finance Committee and their being signed into law by the Minister of Finance.

As detailed below, these are legislative amendments that are intended to effect the following amendments and reforms –

  • Solvents and lubricating oils reform.
  • Increasing the excise duty/purchase tax rates on natural gas, LPG, mazut, coal and petcoke, as well as amending the definition of “mazut”.
  • Restricting the recognition of fuel expenses for income tax, VAT and under the diesel drawback for the purpose of expense documentation through automatic refueling system (dalkan) alone.
  • Recognizing mixtures of bio diesel and diesel (B7) as diesel for imposing taxes and for the diesel drawback.
  • Narrowing the “diesel drawback”.

 

A. “Solvents and Lubricating Oils Reform”

Further to our client update from July 2021, three orders will be enacted within the framework of this reform: the Excise Duty on Fuel Order (Imposing Excise Duties)-2004 (the “Imposition Order”); the Excise Duty on Fuel Order (Exemption and Drawback)-2005 (the “Exemption Order”); the Customs and Exemptions Tariff and Purchase Tax on Goods-2017 (the “Tariff Order”).

As part of these orders, taxes in an amount of NIS 3,978.03 per ton will be imposed on production (excise duty) and importation (purchase tax) of materials – mainly on thinners, lubricating oils and base oils – that are likely to act as fuels or combustibles and that are defined as fuel substitutes. The date of commencement in the draft orders is November 1, 2021.

Alongside the imposition of taxes, certain factories in various sectors will be designated as being permitted to purchase these materials (whether by importation or local production) under  an exemption from taxation for the purpose of producing certain goods (as defined in these orders).

The sectors that are able to purchase fuel substitutes without these taxes are: rubber, adhesives, detergents, printing and ink, sealing materials, pesticides, agrochemicals, explosives, colors, pharmaceuticals, cosmetics and edible oils.

We note that the exemption will only be given for the use of materials as a part of the production process of goods (i.e. as an input that remains or is removed following the production process), and not for the purpose of energy production, lubrication, rinsing and cleaning.

Factories interested in purchasing fuel substitutes with a tax exemption are obligated to register as “exempted factories” with the Tax Authority and to establish a regime for reporting and providing guarantees as required by the Tax Authority. Accordingly, in the event that you use solvents or lubricating oils, make sure that your industry is defined as one that is permitted to purchase fuel substitutes with an exemption and whether your specific use of these materials is exempt.

We also note that, in accordance with the Imposition Order, factories that produce or recycle fuel substitutes will be considered “fuel producers” and will be required to obtain a “fuel producer” license and will be subject to strict oversight and controls by the Tax Authority.

Furthermore, the Imposition Order was amended such that a mixture of a fuel substitute with any other material will be considered a “fuel product” that requires a fuel producer license, and the mixture will be subject to excise duties at the same level as excise duties imposed on benzene, which is the highest level imposed by the Imposition Order.

Moreover, the orders impose a tax on a “dealer” that holds fuel substitutes as inventory in its business and, as of the commencement date, possesses fuel substitutes in an amount whose tax burden is greater than NIS 10,000.

Comments to the draft can be submitted until September 30, 2021. Similarly, the orders require approval from the Knesset Finance Committee.

The following are links to the drafts:
Draft Excise Duty on Fuel Order (Imposing Excise Duties)
Draft Excise Duty on Fuel Order (Exemption and Drawback)
Customs and Exemptions Tariff and Purchase Tax on Goods 

 

B. Increasing the Excise Duty/Purchase Tax Amount for Natural Gas, LPG, Mazut, Coal and Petcoke and Amending the Definition of “Mazut”

Within this framework, draft amendments to the Tariff Order and the Imposition Order were published providing that certain taxes (purchase tax on importation and excise duties on local products) will be raised gradually between the years 2023-2028 on natural gas, LPG, mazut, coal and petcoke. The first step will be on January 1, 2023. At the end of this process in 2028, the tax on natural gas will be NIS 170/ton. The tax on LPG will be NIS 852/ton. The tax on low-sulfur mazut will be NIS 833/ton. The tax on high-sulfur mazut will be NIS 1,621/ton. The tax on petcoke will be NIS 625/ton and the tax on coal will be NIS 456/ton.

Different types of mazut currently enjoy lower excise duty rates than diesel. Within the framework of the proposed amendment in the Imposition Order, the definition of “mazut” is amended in two ways. First, mazut will have to be “completely or mostly from refinery residues.” Additionally, its minimum viscosity at 50 degrees Celsius will be higher than 50 centistokes. Material that does not meet these cumulative criteria  will be not be considered mazut and will not enjoy the low duty rate.

Comments to the draft can be submitted until September 30, 2021. Similarly, the orders require approval from the Knesset Finance Committee.

The following are links to the drafts:
Draft Customs and Exemptions Tariff and Purchase Tax on Goods
Draft Excise Duty on Fuel Order (Imposing Excise Duties) 

 

C. Restricting the Recognition of Fuel Expenses for Income Tax, VAT and under the diesel drawback for the Purpose of Expense Documentation through Automatic Refueling System (Dalkans) Alone

Drafts for amendments to the Value Added Tax Regulations-1975, Income Tax Regulations (Deduction of Vehicle Expenses)(Amendment No.X)-2021, and Exemption Order were published, such that fuel expenses will not be a recognized expense in any of the tax frameworks (income tax, VAT and the diesel drawback) unless consumption is documented in the automatic refueling system (dalkan).

It is noted that this reform will not apply to all of the tools that consume fuel, but rather only to vehicles that travel on standard roads (cars in classes N, L, M or T, excluding mobile foot machines).
Comments to these drafts can be submitted until September 30, 2021. Similarly, the orders require approval from the Knesset Finance Committee.

The following are links to the drafts:
Draft Value Added Tax Regulations
Draft Income Tax Regulations (Deduction of Vehicle Expenses)
Draft Excise Duty on Fuel Order (Exemption and Drawback) 

 

D. Recognizing mixtures of bio diesel and diesel (B7) as diesel for imposing taxes and for the diesel drawback

According to the drafts, the definition of “diesel” was amended in the Imposition Order, such that, from this point, mixtures of diesel with up to 7% bio-diesel will be considered diesel. As a result of the amendment, the tax on this mixture will decrease from a rate of NIS 3,055.85 per thousand liters to NIS 2,927.84 per thousand liters. Additionally, consumers of this mixture will be able to receive a diesel drawback for the mixture’s use on the same basis as their eligibility for the diesel drawback had they used regular diesel.

Comments to this draft can be submitted until September 30, 2021. Similarly, the orders require approval from the Knesset Finance Committee.

The following are links to the draft:
Draft Excise Duty on Fuel Order (Imposing Excise Duties) 

 

E. Narrowing the “Diesel Drawback”

The Excise Duty on Fuel Order (Exemption and Drawback)(Amendment and Temporary Order)-2018 established a gradual nullification of aspects of the excise duty drawback arrangement for diesel for transportation, which was anchored in the Exemption Order.

Section 4(b) of the order adopts a commencement provision under which the narrowing of the drawback for certain groups will be conditioned upon the issuance of approvals required under law for offering refueling services for natural gas to 25 active refueling states by January 1, 2024.

Within the framework of the draft amendment, it is proposed to expand the scope of the kinds of refueling stations that can trigger the narrowing of the drawback. Thus, in place of relying on natural gas refueling stations alone, other types of refueling stations for the refueling of diesel substitutes (i.e. natural gas, 100% bio-diesel as defined in Israeli Standard No. 5731, 20% bio-diesel or 30% bio-diesel as defined in Israeli Standard 16709) or for the provision of electric re-charging will count towards the 25 active refueling stations.

Comments to this draft can be submitted until September 30, 2021. Similarly, the orders require approval from the Knesset Finance Committee.

The following are links to the draft:
Draft Excise Duty on Fuel Order (Exemption and Drawback) 

 

Our firm handles these issues and is in regular contact with the Tax Authority about them. We would be happy to advise regarding any specific questions and to help as necessary, including with the submission of comments to these drafts. The above review is only meant as a summary of the main points in these draft orders and should be not seen as a legal opinion or as legal advice.

Wishing you a happy holiday,
Herzog Fox & Neeman

 

Meir Linzen | Chairman
Chairman of the firm and head of tax department
linzen@herzoglaw.co.il

 

 

Iris Weinberger | Partner
Tax department

weinbergeri@herzoglaw.co.il

 

Mordechai (Moti) Fogel | Associate
Tax Department

fogelm@herzoglaw.co.il