In and out – can you get the duty back?
Where raw materials are imported into Israel and import taxes, such as customs duty and purchase tax, are paid on them, and those materials are subsequently used to manufacture products that are exported abroad, the import taxes paid may be refunded, subject to the conditions prescribed by law. This refund is known as “drawback”.
The rationale underlying drawback is that there is no justification for imposing import taxes on raw materials which are ultimately not consumed in Israel, but are instead exported as part of a product manufactured in Israel.
An important exception arises under the trade agreements between Israel and the European Union. Under these agreements, drawback may not be claimed in respect of import taxes paid on raw materials originating in third countries where those materials were used to manufacture a product declared to be of Israeli origin and which consequently benefits from an exemption from customs duty upon its importation into the European Union.
The purpose of this prohibition is to prevent a double benefit: both the refund of the import taxes paid in Israel on the raw materials and an exemption from customs duty in Europe on the basis of the product’s Israeli preferential origin. An equivalent prohibition does not appear in every other trade agreement to which Israel is a party, and each case must therefore be examined on its own facts and under the relevant agreement.
In certain circumstances, drawback may also be available where a product imported into Israel is subsequently exported in the same condition, without having undergone any manufacturing process or alteration. The same principle applies: the product did not remain in Israel for domestic consumption, and the importer may therefore be entitled to a refund of the taxes paid upon its importation.
Refund mechanisms are available not only in relation to customs duty, but also in relation to purchase tax and, in certain circumstances, VAT paid on personal imports. For example, a person arriving in Israel with a luxury watch who declares it through the red channel and pays the required VAT may be entitled to a VAT refund upon leaving Israel with the same watch at the end of the visit, subject to compliance with the applicable conditions and the presentation of the required supporting documents.