Withholding tax when the percentage of deduction changes after a partial payment

Background

Pursuant to the Israeli Income Tax Ordinance, income tax must be deducted when a payment that constitutes taxable income with the payee, income tax can grant an exemption from withholding tax or set different percentages of withholding tax. When an invoice is paid in several installments, tax must be deducted on each payment according to the percentage determined for the recipient of the payment at the time the payment is made.

The problem

When part of an invoice is paid through a request for partial payment (transaction F-59) and after the payment the percentage of deduction applicable to the recipient of the payment changes, when paying the balance the system deducts tax as if changing the deduction percentage also applies to the payment made before updating the deduction percentage.

Solution

In order to avoid incorrect withholding tax the remaining payment must also be paid through a request for partial payment (transaction F-59) and thus the system will deduct tax according to the new percentage only from the current payment.