Following the Iron Swords War, significant logistical difficulties arose regarding the shipping of cargo to Israel.
There were, and still are, cases of shipping lines declaring an end of voyage, ultimately not calling at Israeli ports, but instead declaring the end of voyage at another port in Europe or elsewhere. Due to the crisisin the Red Sea and the activities of the Houthi movement, shipping companies willing to call at Israeli ports are not sailing through the Red Sea but rather circumnavigating the African continent. which leads tosignificantly higher shipping costs due to the extension of the voyage.
Under Israeli law, shipping costs are added to the transaction price for import tax purposes, as stipulated in Section 133(a)(5) of the Customs Ordinance: For the purpose of determining the transaction value as stated in Section 132, the following shall be added to the transaction price… if not initially included therein, the cost of transporting the goods to the port of import or place of import.
However, the Israeli legislator was aware of situations where there is no justification for including certain shipping costs due to circumstances beyond the importer’s control. Therefore, in 2000, an amendment was made to the Customs Ordinance, granting the Customs Director the authority to exclude certain shipping costs from the transaction price. It was thus stipulated in the law: “except for such costs incurred due to special circumstances beyond the importer’s control, and the Director has determined that they should not be included in the transaction value; the Director may establish rules and conditions in this regard, including types of goods, types of transportation and other services.”
Indeed, already on 16.10.23, the Israeli Customs Director, Mr. Kfir Chen, issued the following guideline:
“In accordance with my authority under Section 133(a)(5)(a) of the Customs Ordinance, I hereby determine that the shipping costs incurred by importers due to the state of war as of 16/10/2023 and until further notice shall not be included in the transaction value for the purpose of calculating import taxes.
It is clarified that these are costs of transportation, unloading, and loading detailed in the freight invoices paid by the importer in addition to the payment made for transportation, unloading, and loading at the beginning of the voyage, and which were incurred by the importer solely in the case of a “End of voyage” declaration at foreign ports, over which the importer had no control.
Additionally, expenses detailed in freight invoices as “War Risk Surcharge” imposed by the shipping company on all its customers in Israel during the war.
The importer must prove the existence of the aforementioned additional costs of the “End of voyage” type and/or war risk surcharge. Accordingly, the importer shall attach to the import declaration documents regarding the original costs and the additional costs, for the purpose of proving that the aforementioned costs meet the conditions detailed above.”
At that time, the Houthi activity in the Red Sea was not yet significant, and therefore the Customs Director’s reference was given regarding end of voyage costs and war risk surcharges, but not regarding the costs of circumnavigating the Red Sea itself.
However On 18.3.24, following advocacy efforts by various entities, the Customs Director issued the necessary clarification regarding the circumnavigation of the Red Sea. Here are the key points of the guideline:
“In accordance with the authority set forth in Section 133(a)(5)(a) of the Customs Ordinance, the undersigned determines that the additional shipping costs imposed/to be imposed on importers and directly related to the “Iron Swords War” situation and maritime shipping from the Far East through alternative routes due to the “Houthi” threat in the Red Sea shall not be included in the transaction value for the purpose of calculating import taxes.
It is clarified that these are costs of transportation, unloading, and loading detailed in the freight invoices paid by the importers directly or indirectly, in addition to the payment that would have been made for transportation under pre-Red Sea events conditions, and which were incurred by the importer only in cases of rerouting of the shipping route from the Red Sea to circumnavigate the African continent, as well as in cases of rerouting the shipment for unloading at foreign ports and its subsequent reloading for transport to Israel (hereinafter: “the Additional Costs”).
The exclusion of the Additional Costs is conditional upon the importer attaching to the relevant import declarations all documents showing the Additional Costs imposed by the shipping agents/companies (including the relevant freight invoice).
In cases where the shipping costs are included in the supplier’s terms of sale and imposed on the importer, the documents charging the Additional Costs paid by the supplier to the shipping agents/companies, including the relevant freight invoice, must be attached. Additionally, the breakdown of the additional costs in the supplier’s invoice must be attached.
It should be emphasized that in the case detailed above, the importer must be able to prove, if required, that the price of the imported goods, minus the shipping cost, did not decrease from the price set before the imposition of the Additional Costs, and that the supplier did not compensate/reimburse or share the Additional Costs of shipping in any way, including a reduction of the value (for customs purposes) of any kind of goods sold.”
It appears that with regard to shipments purchased under ex-works, FCA, FOB and similar terms of sale, i.e., situations where the importer purchases the shipping services, the importer shall not have difficulty proving that the additional costs result from circumnavigating Africa.
On the other hand, it seems that the guideline poses significant challenges in cases of purchase on CIF terms. According to the guideline, the importer is required to attach the documents showing the Additional Costs paid by the supplier to the shipping agents/companies, including the relevant freight invoice. However, the supplier may not always be willing to disclose the actual invoice and may prefer to provide an explanatory letter clearly detailing the matter. It would seem appropriate for the Tax Authority Director to consider more flexible alternatives in this case.
The content 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.
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