In the first half of the 19th century, criminal cases at London’s Central Criminal Court – The Old Bailey – generally lasted less than half an hour, hardly enough time for the noose to tighten around a petty thief’s neck. Meanwhile, as evidenced by the fictitious Jarndyce versus Jarndyce in Bleak House, Chancery cases over a deceased’s estate could last for generations. The reason for the difference? As Dickens made abundantly clear – the lawyers’ predilection for money (the average sheep stealer, about to ignominiously meet his Maker, didn’t have much free cash to offer).
Two centuries on, the criminal justice system is far more sophisticated, but the civil one can still leave the man in the street gobsmacked as to how lots of disputes manage to come before a judge, or – at least – before more than one judge in more than one court (no prizes for guessing why).
A case in point. An individual, who had lived in the UK for many years, came back to Israel as a Veteran Returning Resident. The status entitled him to a 10 year exemption from income tax on foreign income from the various sources listed in the Income Tax Ordinance, or the source of which was in assets outside Israel (if you don’t quite understand that underlined bit, don’t fret, all will be revealed). The individual continued to receive a salary from his UK employer – part of a substantial international group – while he worked out of the offices of its Israeli subsidiary. The position of the Israeli Tax Authority concerning veteran returning residents ( as well as first time residents) who spend some of their time working in Israel and some of the time abroad, is to split the income according to time worked in each jurisdiction, only exempting the foreign portion from tax in the first ten years. The position of the tax authority is, however, not law, and many use transfer pricing studies to more accurately assess the value of the work abroad versus the value of work in Israel.
Our hero decided to go the extra mile. Presumably because he didn’t spend too much of his time abroad and was sinking without a lifeboat, he plumped for the mysterious underlined ‘or’ above – that the source of the income was in assets outside Israel. It transpired, so the tax authority and subsequently the district court were told, that he was being paid for the sales systems (we are talking how to pitch here, not some genius algorithm) he had developed for the UK company and its international subsidiaries while working there. As a result, the source of his income was in assets outside Israel, and therefore exempt.
Nice try. Had a combination of avarice, arrogance and – that most annoying feature of the modern world – facts not undone him, he might have got somewhere.
The individual had filed his tax return – and conducted negotiations at a subsequent tax authority audit – on the basis that a portion of his income (under 40%) was liable to tax in Israel, while the lion’s share was not, due to the abovementioned argument. The tax authority rejected the approach and offered ‘beyond the letter of the law’ to use their usual split of working days in and out of Israel (which, in tax authority doublespeak, is the letter of the law they were now claiming to be beyond the letter of the law). The matter went to the district court which, given the tax authority’s proclivity for ‘going beyond the letter of the law’ on a regular basis, represented a welcome safeguard, however tenuous for the case at hand.
The judge ruled in 2018 that, with one unrelated exception not considered here, the tax authority was correct. Indeed, had Israel employed a jury system of laymen, the ‘twelve good men (women) and true’ could have abdicated their right to retire from the courtroom, and delivered their verdict immediately as one woman (or man). His Worship’s work was assisted by the individual changing his claim of partial exemption to tax, to full exemption, which was just plain silly.
Among the judge’s reasons were as follows. While he would have been willing to entertain proof that some of the income was in respect of this earlier contribution to the group abroad, there was no real evidence that the standard monthly payment to the individual was anything other than a salary for his ongoing employment, and anyway some of his income must have been for ongoing services, surely. While a letter from the UK CFO stated that the remuneration was, indeed, in respect of the ‘asset’ he had developed, which served a number of countries, the amount was entirely fixed as opposed to relating to the contribution to the various countries. In any event, in the course of questioning, the individual had stated that he had requested the letter – in the absence of any formal agreement – to give to his accountant. The CFO of the Israeli subsidiary, when visited by tax authority representatives, said she didn’t know exactly what the individual did, but he was at their office most days, and dealt with Israeli customers. To cap it all, the individual did not call the UK CFO to give evidence, citing that he was very busy.
Without wishing to put words into the judge’s mouth, the individual was wasting the court’s time.
It was what happened next that was the ultimate chutzpah. The case went to appeal at the High Court. Two weeks ago, the three judges unsurprisingly found in favour of the tax authority. The only comfort for the man in the street, who pays much of the cost of such proceedings, was that, in the process, they added some clarity to the law. Or did they?
When reading the terms of the exemption, the first thing they said to do was to establish the nature of the source of income (eg work income, business income, royalties), then establish if it is foreign ( there is a section in the law that clearly states how that is done for each type of source). Two judges were of the view that only passive income could be sourced in assets outside Israel (that underlined bit above), and in the current situation the remuneration was active salary income. The third judge (who happened to be the Deputy Chief Justice), without specifying, said that active income could also be sourced in assets outside Israel, though that was not relevant in this case.
The judgement appears to suggest that nobody really understands what that bit in the law about assets outside Israel is there for. Real world examples, according to either approach of the High Court judges, are hard to find. More likely, the phrase was thrown in by a draughtsman who had either had too little, or too much, sleep.
It would have been much cheaper to find a pretext to hang the fellow at Tyburn.