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Precedent setting ruling of the Supreme Court regarding the VAT component in tender bids

13.12.20 | 09:55  

Attached for your perusal is a memorandum on the subject of the "Precedent setting ruling of the Supreme Court regarding the VAT component in tender bids" which we hope you will find to be of interest. You are welcome to contact our firm should you have any question or require any clarification regarding the contents of this circular.  

We considered it appropriate to bring to your attention an important ruling of the Supreme Court [Administrative Petition Appeal 6466/19 Ministry of Defense v. Association of Long-Term Care Companies (published in the Nevo legal database, 11.10.2020)], which was given on 11.10.2020, and which addresses, inter alia, the fundamental issue of how the VAT component should be weighted when comparing tender bids, and how those orchestrating public tenders must treat bids submitted by non-profit institutions (NPOs) compared to bids submitted by companies. 

The ruling was given within the framework of an appeal filed by the Ministry of Defense against the judgment given in July 2019 by Her Honor Justice Dr. Michal Agmon-Gonen of the Tel Aviv District Court, sitting as the Administrative Affairs Court, in which the Supreme Court reversed the decision of the Administrative Affairs Court.

While the Administrative Affairs Court held that the principle of equality in tender law required bids to be compared without the VAT component and that this principle prevails over the principle of "the cost to the customer" (a principle which means that the comparison between bids should be made on the basis of the actual amount which the customer shall be required to pay the actual bidder), the Supreme Court ruled that the position of the Ministry of Defense should be accepted, and that the principle of "the cost to the customer" is the prevailing one.

In this regard, it was held that the authority issuing the tender must endeavor to maximize the transaction's inherent economic benefit, and since those bidding in the tender are separated by different characteristics, including vis-à-vis their costs and expenses structure, the tender issuer is not supposed to have regard to the characteristics and considerations of each and every bidder. Since the VAT component is an integral part of the consideration being paid by the issuer to the bidders in the tender, ignoring the VAT component in the bids would be tantamount to examining the bids in the tender based on a different price from the price which shall actually be paid, and creates a distortion from an economic perspective.
However, it was held that, as a rule, and in order to remove doubt regarding the NPO's VAT liability with respect to its pecuniary offer, the NPO submitting the bid within the framework of the tender must have a clearance from the tax authorities in advance showing that it is actually exempt from payment of VAT. It was further held that the Tenders Committee may exceptionally change the aforementioned requirement to submission of a certificate from an external lawyer or accountant specializing in the field, in cases where the bidder attaches to his bid a copy of his request to the tax authorities for VAT exemption clearance, which was submitted ahead of time and by no later than 45 days from the last date for submitting bids in the tender.  

The information contained in the above review is provided for informative purposes in an abridged format and under no circumstances does it constitute a substitute for legal advice.