To tax or not to tax…..
Forced to summarize Israel’s international tax legislation in half a sentence, I could not better Shakespeare’s all time bogeyman – Richard III:
“Deformed, unfinished, sent before my time/ Into this breathing world, scarce half made up”.
Tax legislation in the first half-century following Israel’s independence adopted, what might now be termed, the “Mitt Romney Approach” – inconsistent but pragmatic. At a time when citizens were largely barred from investing abroad, work income and capital gains were charged to tax on a worldwide basis while income such as dividends, interest and royalties from abroad were, in practice, exempt.
Then, following liberalization of exchange controls and serious personal and corporate investment abroad in the late 1990s, legislation passed the Knesset in mid-2002 moving Israel to a pure worldwide basis of taxation with effect from January 2003. This almost pedestrian approach to enforcing the new law – allowing around six months to get organized – was, and is, in contrast to the normally frenetic approach adopted by the Knesset, Israel’s parliament, which regularly enforces legislation almost overnight (and, sometimes, the previous night or earlier).
This may explain the remarkably naive stance adopted by certain respected tax advisors at the time, who insisted, to the horror of the more worldly among us, to advertise their prowess at every opportunity in the national press, explaining the broad (but, rarely, precise) methods to legally circumvent the new regime.
While the income tax authorities could (and can) be accused of many things, illiteracy is not one of them and, lo and behold, they managed to fit the art of newspaper reading into their busy schedules. It was therefore little surprise to the mature and experienced when, prior to enforcement of the new law, an amendment to the amendment was passed in the Knesset to close the loopholes that had been so altruistically revealed by our fellow professionals.
But, as Hamlet (topically since Israel has just ratified a new double taxation treaty with Denmark) said – “Aye, there’s the rub”.
The authorities were in such a rush to get the legislation passed ahead of the January 1 deadline that the adjustment left much to be desired ( for them, if not for the rest of us). To add to the misery that awaited them, they had insisted in going it alone with the legislation. They had neither canvassed extensive public comment nor, apparently, recognized that, not being the first, second or fiftieth nation on earth to adopt a worldwide basis of taxation, it might be wise to benefit from the learning curves of others rather than starting from scratch.
The result was : a flawed system of credit for foreign taxes paid; ambiguous controlled foreign corporation rules, the latest explanatory notes in respect of which came out only a month ago – nine years after the legislation came into effect; a participation exemption regime that literally exempted almost everyone from participation and, from day one, was treated as if it had leprosy; and a tax-transparent company system that has transparently gone nowhere. We were subsequently introduced to Trust-Nobody Trust rules in 2006 and, two years later, the Worldwide Untax Regime for new immigrants and returning residents.
While this blog will endeavor to maintain a truly international flavor, I make no apology for including from time-to-time in the weeks and months ahead, reflections on the system with which I have an “up close and personal” relationship. At the end of the day there is much more that unites countries in their international taxation rules than divides them and I hope those reflections are of interest to everyone.