‘But he was always good to his mother,’ has been applied to more gangsters from the golden age of crime than history suggests is reasonable.  ‘But he has always paid taxes,’ may not have applied to Al Capone, but it is the defense heard over the years for many upright non-taxpaying immigrants to Israel, who continued to pay taxes in their countries of origin, when they should have, instead, been paying those taxes to Israel. Neither argument is very convincing.

It seldom takes long to put those well intentioned, but misguided, immigrants right – taxes are the glue of a nation state, and it is residents of a nation state who need to keep the nation state afloat. (Eritrea and the United States have a different view – but even they recognize that the country of residence gets first bite of the apple before citizenship wades in).

Given the simplicity of the concept, it is remarkable how virtually everybody falls short when the dilemma is presented differently.

For the last five years, the Israeli tax authority has issued an annual list of ‘Tax Positions Requiring Reporting’ (the list is cumulative). Basically, they are positions taken in a tax return which are contrary to that of the tax authority, and have to be owned up to if they produce a substantial tax saving (NIS 5 million income tax in the current year,  or NIS 10 million over four years).

The list produced the week before last for 2020 was heavily biased towards the issue of foreign tax credits – the amount of foreign tax that can be credited against Israeli tax on international transactions. What was most notable about the list was that there was nothing that was particularly controversial – if it wasn’t the ‘clear as the light of day’ law, it was the most likely interpretation of it.

However, from time immemorial, advisers have often automatically claimed  their clients’ tax withheld at source abroad as a tax credit in Israel, without as much as a pang of conscience. Although not many positions will produce tax savings of NIS 5 million, the list published in December is indicative that the tax authority is looking to tighten up generally in this field.

Things to look out for when entering a foreign tax credit on a tax return are, inter alia: whether the foreign jurisdiction deducted more than the amount permitted under treaty (many countries do that, and expect a treaty reclaim afterwards); if all or part of income on which tax was deducted is exempt from tax in Israel; whether expenses against an item of income in Israel lowers the tax to below that deducted in the foreign jurisdiction; the type of income producing the withholding tax abroad as compared with the income seeking the credit (eg royalties v interest); the ability to take the credit against other income; the ability to carry forward unused credits; and the  date of payment of the  foreign tax. Dividends live in a little world of their own.

The underlying principle in most cases is that, just because a foreign jurisdiction slams a higher rate of tax on income than Israel, Israel’s tax authority does not need to subsidize the taxpayer by allowing extra tax paid abroad to reduce the tax on local income.

Al Capone is reputed to have said: ‘I don’t even know what street Canada is on’.  To be clear, when it comes to tax credits, Canada is abroad.

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