Tax Break

John Fisher, international tax consultant

Archive for the category “Israel”

Hand it over and nobody will get hurt

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Automatic exchange of information between governments has been suspected for years

The ink on the page of my last post about the new softer, gentler approach to tax collection was not yet dry when Israel’s main financial daily ran a banner headline concerning the upcoming automatic exchange of information between tax authorities. The wording was a rather unimaginative: ‘ A flood of requests from foreign banks on the way: Demand  reporting of Israeli residency.’ Personally, I would have gone for the more catchy: ‘We will find you, and we will kill you.’ Game on.

The Common Reporting Standard, that – based on domestic legislation –  will require most  of the world’s tax authorities to collect data on foreign resident accounts from financial institutions in their jurisdictions and ship it out to the salivating jaws of the tax authorities of the account holders’ countries of residence, is at the door (see Tax Break January 7, 2019).

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Not a word about tax evasion

What bothered me about the headline, and the accompanying two page article, was not the accuracy – in my younger days, I would periodically pull my hair out at the distorted product of an interview I had given to that particular journal on a hot topic. This piece, however, appeared researched and reasoned. My problem was that any reader of the newspaper, other than someone with a financial death wish, has already done what they had to do (compliance, voluntary disclosure, or expensive – and possibly regrettable – planning). Meanwhile, a colossal number of people who do not read the financial press, and may not be financially savvy, remain – incredibly – blissfully ignorant as their canoe careers inexorably towards the falls.

As the death knell for international tax evasion has grown louder in recent years, the Israeli tax authorities (in line with many of their international counterparts) have shown remarkable restraint in enabling errant residents with unreported income from abroad to come clean with minimum fuss (paying some tax and remaining friends). Voluntary disclosure programs have been renewed, extended (there is currently a program in force until the end of this year – albeit without the previous advantage of anonymity),  and-where relatively small amounts are involved – even made simple.

The trouble is that, in a country like Israel that does not require a tax return from most salaried employees, many people  don’t ‘think’ tax of their own volition. So, when Belgian Aunt Sophie left Yossi  the contents of a bank account in Switzerland which sensible Yossi didn’t touch – treating it as rainy day money – he also didn’t think to report the interest to the Israeli tax authorities. And, unprompted, he still doesn’t. He will presumably start thinking about it when he gets a summons to appear in court in his mail box. The tax authorities will have achieved exactly what they actively set out not to do – waste valuable resources crucifying people they are not interested in. As Jesus  is reputed to have said a mile and a half  from where I am now sitting: ‘Forgive them, for they know not what they do.’

The solution is so simple, it hurts.

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I don’t care WHAT you were doing in the bank…

In the absence of a universal tax return, every resident over the age of 18 should be required to complete and submit a simple annual questionnaire (either online or offline) including such questions as: ‘Do you, or any of your children under the age of 18, have any access to the contents of a  foreign bank account?’ The answer ‘Yes’ to such questions should result in a compulsory tax return coming through the door. Failure to complete the form should result in a compulsory tax return coming through the door together with an appropriate fine designed to concentrate the  mind of even the most financially illiterate.

And, if that doesn’t work – the tax authorities need feel no guilt in unleashing the Spanish Inquisition.

 

 

 

Fishy business

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The good old days…

Among the moral influences on my childhood, and that of my fellow English countrykids, was Hilaire Belloc’s ‘Cautionary Tales for Children’. Entering the Land of Nod at night to the story of Jim who ran away from his nurse and was eaten by a lion, or Matilda who said lies and was burnt to death, none of us was likely to deliver on any 6-year-old’s lurking urge to commit mass murder or rob a bank. Our parents knew how to keep us on the straight and narrow – pure, unadulterated fear.

In a long(ish) career, I have always tried to avoid instilling fear in clients. Clear explanations, and the earning of trust, are usually enough to encourage action. However, there is one area of taxation  in Israel that sometimes demands a little more persuasion when it comes to foreigners, both corporate and individual, setting up businesses here –  professional bookkeeping. And from this month we have a Cautionary Tale all of our own, thanks to a judge in the Tel Aviv District Court.

The judgement reads like a funny children’s book:

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‘101, 102…’

One fine day (that is approximately how the judgement starts) a woman walked into the local fishmonger operated by a Mr Katzav (Google translate: Mr Butcher). It seems they had an argument about the price (he wanted 108 shekels and she was only willing to pay 103 shekels). She ultimately insisted on paying him in notes and coins of small denominations, and stormed out of the shop. Waiting in the street were two comically ill-prepared tax inspectors who were there on a tip-off. They converged on the woman, in sight  – through the window – of a clueless Mr Butcher, and managed with difficulty to extract from her the details of her purchase. Thanks to nobody keeping proper track of what happened next (maybe no fewer than 3 inspectors are needed for that), there was some dispute as to whether the inspectors entered the shop 2 minutes or 10 minutes after the customer left. There was also some confusion as to whether Mr Butcher was on the telephone when they came in, and whether Mr Butcher decided to ring up the purchase (the cash was already in the till) just before or just after the inspectors identified themselves.

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Excellent powers of deduction

The bottom line was that none of the details really mattered (and the tax inspectors must have thanked their lucky stars for that). Once the judge had cleverly concluded that there was no way the officials could have been in the shop confronting Mr Butcher within anything close to 2 minutes – the mere fact that he was late in ringing up the purchase was enough to sink him.

Israeli bookkeeping regulations, based on statute and relying on case law, require any amount received to be registered ‘close to undertaking the transaction’. Motive is not relevant – the regulation is not designed just for tax evaders; it is also designed to prevent people honestly forgetting. So, ‘close to undertaking the transaction’ broadly means ‘immediately’ ie ‘right now’. (On the other hand, had Mr Butcher been able to show that it was a genuine mistake – wink, wink –  he would have probably been given a second chance, on condition nothing went wrong within the next 12 months.)

In the event, Mr Butcher’s accounting records were declared unfit for that year and, presumably,  the previous one. To be clear, that is a smelly state of affairs – the tax authorities can assume higher income than reported, and fines may be imposed.

While the non-registering of income is the most critical offense, there are a myriad bookkeeping rules for differing areas of business, right down to the specific layout of tax invoices. If practice is materially out of sync with the regulations, the same result can occur as with Mr Butcher. (Even the ‘second chance’ is scary as a sneaky follow-up audit could be expected during the probation period).

The takeaway should be that, anybody running even a one-man business needs to be sure that all details of the complex bookkeeping regulations are adhered to. That will, more often than not,  mean using the services of a professional bookkeeper.

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Hull – the UK’s current City of Culture

The first corporate liquidation in which I was involved, some 35 years ago, was of a Hull (a coastal town in Northern England) based fishery. They sent the records down to London. When we opened the boxes, the books stank in more ways than one.

Bog standard (almost)

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These days a bloke would do anything for a free ticket to Australia

Charles Dickens’s fecund imagination allowed Pip’s benefactor Magwitch to return to England  from transportation to an Australian penal colony, albeit at risk of judicial execution. By all accounts, thanks to the triple-knot of location, location, location, escape for  real-life transportees wasn’t all that simple. What the desperate convicts of the nineteenth century needed was the solution of the  twentieth – air travel. And, in a twist of fate, the first person to pilot a controlled flight in Australia (back in 1910) was none other than history’s greatest master of escape, Harry Houdini.

Well, by now, the world’s tax advisors are becoming used to the locks, double locks and padlocks being used to prevent international tax planners from thinking out of the box. But, the tax treaty signed (though not yet ratified) last month between Israel and Australia plonked a kangaroo, with a 10 ton weight in its pouch, on the box’s lid.

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Truth be told, the Wright Flyer never did move very much.

The treaty itself is not very exciting. It contains much of the usual – just about comprehensible – gobbledygook, together with a fair share of the totally ludicrous. An  example of the latter: SHIPS AND AIRCRAFT SHALL NOT BE REGARDED AS IMMOVEABLE PROPERTY. Thanks for that.

There is also an unhealthy obsession with the amount of time that needs to elapse before work on a  construction site or installation project by a resident of one country  becomes taxable in the other – too many numbers and too many conditions (and given the nature of trade between the two countries – not too many instances).

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Spreading the love (and hate)

At the end of the day – as with all treaties – it is withholding taxes that are the real bread, butter and Vegemite of the agreement. These fit within the ‘new normal’ of international double taxation treaties: 5% – 15% for dividends, 5% – 10% for interest, and 5% for royalties. It is the Australians who benefit from this much more than the Israelis. While, in the absence of a treaty, dividends from Israel can rack up upwards of 30% tax, as long as Australian corporate income is franked (ie the company paid tax in Australia), there is no Australian withholding tax. Similarly, Australia’s withholding tax on interest is 10% as opposed to Israel’s mainly 25%. Only when it comes to royalties are the tables  turned.

Among the sparse points of genuine interest is the question of whether the exemption on pensions from Australia to Israel applies to immigrants to Israel in their first 10 years of residence.That one will have the experts opining vigorously.

What makes this treaty ‘different’ is the (what I believe to be unique) ‘Article 28, Protocol’. Now, many treaties have protocols which are agreed explanations and adjustments to those carefully negotiated agreements.  The recent protocol (not yet in force) to Israel’s treaty with the UK (Tax Break  27/1/19) is effectively a new treaty. But, to have a section in the treaty that simply refers to an attached protocol as part of the treaty is – at first sight – circular and balmy.

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No!! Not Hybrid Instruments!

However, closer inspection reveals all. Article 28 is to tax advisors what Room 101 was to Winston Smith in Orwell’s 1984 – the fulfillment of their greatest fear. Among all the normal explanations and clarifications, just in case anyone had any ideas about favourable interpretation of the treaty,  is a section that lists most of the goodies of the BEPS project, stating that nothing in the treaty can stop a country clobbering anybody who tries it on, whatever the wording. Game, set and match.

The Great Houdini’s most famous escape was from a water-filled tank in which he was inserted upside down, heavily manacled. Antipodean tax planners will  soon be standing upside down working out what to do next, together with their right-way-up Israeli counterparts.

Tell it like it is

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Not a robot? Spot the quotes

A rose by any other name would smell as sweet’. That quote from Romeo and Juliet has occupied my thoughts this last week. As an Israeli judge found recently, the concept is only a ‘truth universally acknowledged’ to the extent the rose is inarguably a rose. And, in the process, the learned gentleman took pains and, dare I say liberties with the law, to rub compost in the face of the Knesset (Israel’s parliament).

Israel has had a Law for the Encouragement of Capital Investment for the last 60 years. Primarily a treasure chest of tax and monetary incentives to further the needs of the economy, it has been touched up and renovated periodically as the needs of the State changed and matured. In 2005, in an attempt to simplify a cumbersome process befitting a formerly socialist country,  a boost was given to those industrial enterprises that exported a pre-ordained percentage of their production.

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Not a robot? You don’t need the word ‘export’ to understand ‘export’.

However, the word ‘export’ had to be expunged from the Law’s lexicon. Offering export incentives threatened a shower of fire and brimstone from the World Trade Organization and, specifically, those with whom Israel had free trade agreements (including the US and EU). So, the sophists engaged to draft the law came up with a need to meet one of the following requirements:

  • Income from a specific market must not be more than 75% of total income;
  • 25% or more of total income must be  from a specific market numbering at least 12 million residents.

That would avoid detection in a word search by nosy foreign governments,  while anyone with a brain that worked in accordance with evolutionary theory could interpret the law as demanding  at least 25% export, with no restrictions on the level of exports to any major foreign country. Why 12 million? Probably because it was a lot more than the population of Israel in 2005 (the number was updated a few years back to 14 million with an annual automatic increase).

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How can we be sure anymore that the number of residents of New Zealand doesn’t include the sheep?

Well, populations have a habit of growing, and by sometime in 2012  Israel’s market, which included the residents of  Judea and Samaria aka the West Bank had grown to more than 12 million, and companies that sold exclusively to Israel decided to claim the benefits of the Law. The tax authorities told them, in no uncertain terms, to go fly a kite.

The courts got involved and agreed with the tax authorities (the tax authorities’ argument had layers not elucidated here). The appeal was heard this month.

Although, at bottom line, the appeal was thrown out, the judge disagreed with the tax authorities that Israel could not, in principle, be included in the second condition, offering a long and reasoned argument. The upshot would be that no exports were required at all – a surprising conclusion. Interestingly, in addition to arguing that exporting was not the clear intention of the law, he completely ignored the first (alternative) condition which, although not negating entirely the Israel-only possibility, made the whole thing Monty Pythonesque.

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They are going to take the judge’s comments very seriously.

Faith in the judge was restored, however, towards the end of the 39 page judgement. Quoting from some of the committee discussions surrounding the 2005 amendment, he lambasted the parliamentarians for the underhand way in which they had sought to hide the export incentive from Israel’s trading partners, making clear that white man mustn’t speak with forked tongue. If, as a result, they got their wording in a twist, they deserved to be punished. He forcefully suggested that the legislature should update the wording of the law.

There is nothing new, or unique to Israel, about actively confusing laws. Back in the 1850s, the author of Little Dorrit invented a whole government department to promote the idea – the Office of Circumlocution. But, perhaps, times they are a changin.

Ain’t no Bonanza

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Let’s face it. The bar was pretty low

Jay Leno once went walkabout in New York asking innocent passers-by if they could name a country beginning with the letter ‘U’. Apart from the usual camera induced deer-in-the-headlights non-responses, a few bright sparks came up with Uganda and Uruguay. At the close of the piece, as the camera faded out, Leno was heard asking: ‘Have you ever heard of the United States of America?’

Judging by the above experience, it can safely be assumed that, had Leno carried on to ask  the name of the alphabetically last of the 50 States, at least one person – having realized there was no State starting with Z – would have thought long and hard about Y and come up with Utah. Alternatively, still on Y, they might have gone for Wyoming. And Wyoming, dear readers,  is actually the correct answer.

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Named ‘The Virginian’, filmed in California, and set in Wyoming. Only in America

Although there is a tendency to think of Wyoming as still set in the 19th century, with characters like Buffalo Bill, Wild Bill Hickock, Doc Holliday and Calamity Jane ambling around the state capital, Cheyenne, it was the birthplace – in 1977 – of one of the most important tax sanitizers in US history.

The Limited Liability Company (LLC) – a mongrel of the corporation and partnership with descriptive terminology all of its own – crawled along at cowboy pace until 1988 when the Internal Revenue Service issued a ruling that LLCs were transparent for tax purposes. At the speed of a Colt 45, American taxpayers could suddenly combine the limited liability of a corporation with the personal taxation of a partnership or sole trader. This was particularly important in America where, despite Reagan’s major tax reform two years earlier, there was no correlation between the tax paid by an individual (up to 28%), and that paid by a corporation (up to 34%) followed by 28% individual tax on a subsequent dividend (over 52% in total). Congress failed to recognize that inanimate companies – while being vehicles of tax liability – cannot pay tax. Unlike Shylock, if you prick them, they do not bleed. Human beings pay the tax – either through the higher prices suffered by the consumers, or the lower profits earned by the shareholders. There is little justification economically for wide differences in total rates.

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Companies don’t have anything to cuff, either

As it turned out, it took until 2018 for the tax rates to be aligned. In the meantime, the vast majority of American private businesses organized themselves as either sole-proprietorships (and partnerships) or – thanks to Wyoming’s pioneering spirit – the new fangled LLCs.

And, thereby, hangs a tale. It was all well and good that America – with the biggest economy in the world – knew how to treat her LLCs, but other countries struggled with defining their treatment under their own laws. They ended up one of the major ‘culprits’ in hybrid mismatch tax planning that was so fiercely attacked in the OECD’s BEPS initiative.

 

Put simply, tax transparent companies in Israel are a rare and specific phenomenon. On the principle that, if it walks like a duck and talks like a duck, it’s a duck, LLCs fit the bill as companies. Therefore, according to statute law, they are not transparent.  However, given the large exposure of Israelis to the American economy, ever since its big 2003 tax reform the Israeli Tax Authority has been finding accommodation for these hybrid beasts. As long ago as 2004 it produced a circular that reiterated the corporate nature of the LLC, but offered solutions to the availability of a foreign tax credit for US individual tax being paid (since the LLC is tax transparent in the US). If the LLC is deemed controlled and managed from Israel, despite being liable to Israeli corporate tax, a credit is given for the US individual tax on profits attributed to the US (up to the level of the corporate tax). Alternatively, the taxpayer can elect at first filing to be taxed on the profits in Israel at the member (Google translate: shareholder) level, with credit for the US taxes. Some have incorrectly interpreted that as complete transparency for the LLC. In fact the circular stresses that the LLC is a body of persons and, in practical terms, that means that losses of  one LLC cannot be offset against those of another. As LLCs are set up at the drop of a cowboy hat in the US, this represents a real problem for many Israeli investors. There are certain planning devices, but advisors have always been aware that the problem exists.

Remarkably, 15 years after the issuing of that circular, essentially an extra-statutory concession, some  jester with nothing  better to do recently inexplicably allowed – not for the first time – a no-hope case to be brought before the courts. The claimant had set off losses between LLCs – in defiance of the circular – basing his claim on (1) Israeli law determining that when a word is stated in the singular, it also means the plural, unless – inter alia – the context does not support that interpretation, and (2) an informal conversation with a senior tax officer who allegedly told him that the problem could have been solved if all the LLCs had been held under a single holding LLC.

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Why have they stopped us handing out the death penalty?

The judge swatted away the first argument – the context clearly didn’t support the multiple LLC claim. But, the second argument was even more off the wall. Whether or not the senior tax officer had been quoted correctly about forming a group of LLCs, THE CLAIMANT HAD NOT DONE SO. Robert Frost wrote a famous poem on the subject, ‘The Road Not Taken’

‘I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.’
His Honour politely demolished this argument, too. Had I been the judge, I would have been tempted to return to the cowboy country roots of the LLC and quote from Clint Eastwood’s 1976 Western, ‘The Outlaw Josey Wales’:
‘Don’t p**s down my back and tell me it’s raining.’

Monkey business

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Pass the monkey wrench

In its relentless efforts to clean us all up, the Israeli Tax Authority has just thrown another spanner in the works of the well-greased black market.

Meek householders faced by odd-job men  demanding cash as they flex their bulging muscles, not to mention seasoned mafiosi and disgraced politicians, will be questioning my timing. Surely,  the ‘Law for Restricting the Use of Cash’ was last year’s news, albeit that it only came into effect two months ago? The man with the leaky roof has already hardwired his brain with a little red light that goes off  when he hears – in a plethora of accents and grammatical constructs – the sum of eleven thousand shekels. Although that is not the final word (or number) on the maximum amount that can be paid in cash – it is a good trigger for the sweat glands to open. From October this year, not only those that demand cash, but those who pay it, will be liable to a fine if caught.

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Cheques are so much easier

The reason for mentioning the incursion into the colourful world of banknotes now in particular is the helpful simulator the tax authority has recently uploaded to its website. The idea – it appears – is that Joe Public can check, in the space of less than a minute, whether a cash payment he plans to receive or make is permitted and, if not, the ‘damage’ if he is nabbed by the long arm of the law.

Having carefully read the authority’s professional circular, replete with numerical examples, and then tested the simulator with the same examples, I have – at time of writing – two criticisms. Firstly,  the simulator’s results in respect of penalties are wrong – someone forgot to program the simulator’s programmer with the correct terms of the law. But, what is a little boo-boo among friends? It is the second point that, in my humble opinion, is the real issue, and on which I feel compelled to dwell.

For a deterrent to be effective, those it targets must either live in abject dread of the terrible consequences of breaking the law: death by hanging, prolonged incarceration, financial ruin; OR they must be left to fear the unknown.

The moment taxpayers can punch the numbers into their smartphones and summon up the bad news – which, starting at 15% of the illegally paid amount, is an irritant rather than a life-destroying event – for many the fine simply becomes a refinement of the black market calculation.

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Joe Public

An example will help the explanation. The abovementioned Joe Public, a typically morally unchallenged householder, hires Art Dodger to redecorate  his house. Art gives Joe a price, but tells him that – if he pays 25% in cash, he will knock off the VAT.  Until the recent change, the only thing stopping Joe was his civic responsibility which – given that he is typically morally unchallenged – is probably handsomely outpriced by the discount. Art, on the other hand, has had to make a risk assessment before making his offer. He will not be declaring VAT and income tax. He probably reckons that – even if he is found out – he will get away with a slap on the wrist and paying both taxes with interest. All in all, the income tax saving is appealing.

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Art Dodger

Enter the new law, and the soon-to-be-corrected simulator. Art retains his sunny outlook about not getting caught. Joe, on the other hand, now knows he has a risk – and, thanks to the simulator, knows exactly how much as he sits across from Art at his kitchen table. Joe might – as the law (and its simulator) hopes – tell Art to forget it. On the other hand, he might – depending on the amount at risk – ask Art to improve his offer. If that happens – depending on how Art responds – the black market  just got more sophisticated.

If I were the tax authority, I would bury the penalty part of the simulator, defects and all, in a very deep hole. The black market is a scourge that, deep down and however much our moral compass waivers , we all want to be rid of. The new law is a step in the right direction.

Oh, and they could always reassign that programmer to ‘Tax Refunds’.

Embrace the Model Treaty

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A real heavyweight of the small screen

When wheelchair bound ‘Ironside’ star Raymond Burr walked confidently down the aircraft steps at Lod Airport in 1974, the reaction of the Israeli public was something akin to the second coming. Still caught in the long shadow of the Yom Kippur War, Israelis were far closer to Tom Brokaw’s ‘Greatest Generation’ than  consumerist 1970s Western Society.  But, that didn’t stop them going bananas over an American TV personality.

Nearly half a century later, Israelis have taken their dubious place in western culture, and they can now fawn and slobber over their own lesser stars. Bar Refaeli – whose completely unearned claim to fame emanates from a combination of heaven-endowed gifts and an unearthly attachment to  silicone – has the nation goggle-eyed over her tax affairs. Based on tabloid rumors, she appears to be in a civil disagreement with the Income Tax Authority over whether she was justified in claiming not to be resident in either Israel or the United States while she shacked up with an Italian-American actor, and in a criminal disagreement over whether she – and her parents – hid critical facts from that same, august authority.

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Tax inspectors are only human after all

More worryingly, the tax authorities themselves seem to have jumped on the media bandwagon with the announcement last week that a committee has been set up to review the criteria for tax residence with a view to establishing greater certainty. Oh dear.

Starting with  the last major tax reform in 2003, Israel has moved forward steadily with the removal of ambiguity about Israel tax residency in domestic law. There was a useful addition to the law in 2007, a requirement to report the basis for an aggressive non-residence position from 2016, and several landmark court cases in recent years. Furthermore, Israel now has double taxation treaties with substantially all the countries Israelis are likely to clear off to (Australia is taking up the rear), which take precedence over domestic law where there is a dispute.

What appears to have put up the Tax Authority’s blood pressure in the Refaeli case (and, in fairness, those of a few other mega-rich individuals) is the claim not to be resident anywhere. That was ably dealt with in a court case back in 2016 concerning a poker player, when the judge made clear that such cases would be rare in the extreme (he even quoted the classic case of a person living on a yacht in the middle of the ocean).

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Sometimes it needs more than the instructions

The problem, if there is one, does not arise  from Israel’s lack of certainty in defining residence. In fact, Israel – in broadly paralleling the OECD Model Treaty guidelines – has a very healthy approach, combining qualitative tests (a person’s center of life), and secondary quantitive tests (number of days present). The problem is that the United States, going it alone as always, relies – at the first level – on a purely quantitative approach. So, in theory at least, an individual like Ms Refaeli could make sure they did not hit the quantitative test in either country, while claiming ‘center of life’ in the United States, where they don’t really care. Hey presto! Not resident anywhere. Any effort to achieve more certainty – like in the United States pure quantitive approach – is probably doomed to abject failure.

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His judgment is not to be trusted…

In cases like Ms Refaeli’s, it is surely far safer to have an Israeli judge look qualitatively at the situation in the light of the facts, and then – as Her Ladyship dons her black cap – stare the  defendant coolly in the eye while pronouncing sentence.

 

 

Keep Calm and Carry On

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About as intellectual as it got

The British have always been a supremely pragmatic people. It was thanks to a fickle king that they knocked religious hegemony on the head early on, and thanks to another misguided monarch that they got their revolution out of the way before the Rousseaus, Marxes and Engels of the world could fill the vacuum with an ideology. Indeed, it was the utterly pragmatic empiricist John Locke who tidied up the mess in the latter half of the seventeenth century.

It is, therefore, no surprise that – despite the cataclysmic events in Parliament surrounding Brexit – the British Government has been beavering away, preparing for the morning after (which, because Brexit is planned for the night of Friday March 29th, will be effectively Monday April Fools Day).

The big news from Davos last week was that Britain and Israel have confirmed ‘in principle’ a Free Trade Agreement similar to that enjoyed between the EU and Israel. With £10 billion of trade, that is eminently sensible for both parties. What received less coverage was the signing  a few days earlier of a protocol to the double taxation agreement between the two countries that dates back to 1962.

Protocols amend treaties. Hearing the words ‘protocol’, ‘tax’, ‘treaty’, ‘Israel’, ‘UK ” (not strictly a word) in the same sentence came as no surprise to my tax-attuned ear. What with all the OECD changes in respect of Base Earnings and Profit Shifting (BEPS) and the automatic exchange of information, protocols are the name of the day. The media reports (that all appeared to stem from the same press release) gave a few details of new provisions and mentioned the obvious. It was only when I downloaded and read the document (who, for heaven’s sake, ruins the party by reading primary sources these days?), that I realized the enormity of what had happened. Perfidious Albion, God bless her!

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What an interesting job

Israel and the UK initialed a new treaty to replace the 1962 one way back in 2009. I remember it well, because I was informally consulted just before initialling, and found a couple of boo-boos. In order for a treaty to take effect, each country needs to take it through whatever processes its domestic law requires – but the stages are identical: initialling, signing, ratifying. In the UK, following the signing,  an Order in Council is issued. That is a process where a Government representative rattles off the wording of a load of boring regulations while the Queen listens (yeh, sure!) and, in the case of a tax treaty or protocol, it goes to a delegated  legislation committee, where it is considered and then brought before Parliament. It can then be ratified.

The 2009 treaty hit a total snafu after initialling. The original 1962 treaty bore the wording: ‘the term “Israel” means the territory in which the Government of Israel
levy (sic) taxation’, and  ‘the terms “resident of the United Kingdom” and “resident of Israel” mean respectively any person who is resident in the United Kingdom for the
purposes of United Kingdom tax and any person who is resident in Israel for
the purposes of Israel tax’. It was widely understood that somebody in London (I hazard a guess, from the Foreign Office) decided that Israeli residents of Judea and Samaria aka the West Bank aka the Occupied Territories should not be included. That was never going to pass muster with  the Israeli Government, and both sides got back in their trenches for the next decade.

But, times change, and these days it might be cheekily argued that go-it-alone Britain needs Israel more than Israel needs Britain (although Britain is still a very-nice-to-have). And that treaty is seriously prehistoric. Meanwhile, as Professor Emeritus of Empire Building, Britain had to watch its step.

Then came the Eureka! moment. It was time to sign protocols with treaty partners. A month after  the UK’s High Commissioner in Cyprus signed with the Cypriots, a British government representative signed with the Israelis. But, there was a subtle difference. The Cypriot protocol ran to a familiar 3 pages; the Israeli protocol ran to an eye-boggling 19. The British and Israelis had effectively shoehorned the long-dormant new treaty into the Protocol, simply passing over the naughty bits.

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I wonder if Mel is one of George’s

The signatory for the British Government was one Mel Stride, Paymaster-General – a name and title which, together with the plot, could have come straight out of a John Le Carre novel.

All that now remains is for the Queen to cock a deaf’un, and for Parliament to be pre-occupied with Brexit. (Israel also needs to ratify).

As regards the new provisions, they can be easily found popping up all over the internet in the same form as they were initially announced.  What seems to have escaped the journalists’ attention is the long-awaited exemption on UK pensions received by Israeli residents (as opposed to the highly-specific exemption from withholding tax on interest and dividends to Israeli pension funds, which was included). New and potential expats, benefiting from a ten year tax exemption on foreign sourced income in Israel,  should be talking to their advisors.

It could have been 1984

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1960s subliminal brainwashing led a generation to careers in numbers

A career in tax really does necessitate a command of numbers. You never know when they are going to unexpectedly turn up and try to bend your mind.

Many years ago, I was asked if I could assist an independent contractor with a spot of number bother with the Israeli tax authorities. I couldn’t.

An Israeli company contracted with a US individual for – what can best be described as – seasonal work. For a number of years, he had arrived on January 1st  and left religiously on July 1st. In those days there were no low-cost airlines encouraging bookings decades in advance, so why was he so particular about the dates? To be back home in time for the July 4th jamboree? No. You guessed it. According to the Israel-US double taxation treaty, independent services by a US resident  are only liable to tax in Israel if the individual is present for 183 days or more. As Israel has always contended that part of a day is to be considered as a day, he had to leave on July 1st – day 182. Since the paying company was required to apply for a withholding tax exemption certificate each year, the matter irritated the tax official charged with issuing the certificates to distraction.

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Not that seasonal

There was nothing the frustrated official could do, so he waited patiently. And his patience paid off. Sometime towards the end of 1999 the individual booked his tickets as usual for January 1st to July 1st 2000. He may even have brilliantly thought he knew what he was doing, but – like over-clever crooks who are  eventually hoisted with their own petard –  he screwed it up. Even though it divides by 4, the turn of a century does not normally sport February 29th UNLESS the number of turns of the century since that event in Bethlehem two millennia ago also divides by 4. 2000 was a leap year, July 1st was day 183, and he was sunk.

This story came to mind now, because January is the month for getting caught napping by the Israeli tax system.

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One way to remember January 30th

Individuals with taxable income from a rental apartment can pay 10% tax on the gross income, rather than much higher marginal rates on the net,  until 30 days after year end. That adds up to January 30th. According to the rhyme I learnt as a child, that is not the day January hangs up its boots  – so paying on the last day of the month, although intuitively the thing to do, is too late. A miss is as good as a mile (although many experts might disagree in this particular case).

Companies that are eligible to maintain their books according to the Dollar Regulations, effectively reporting in foreign currency, are required to elect to do so by that same, busy, day – January 30th. Remember on January 31st – and you will be twisting through the year with the shekel.

Does somebody get their kicks out of tripping innocent taxpayers up with this sort of insidious nitpicking? Or, do the authorities just have a difficult time with numbers?

Telling it like it isn’t

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Very last call …

A rabbi, a priest and the secretary-general of the OECD walk into a bar… Not heard that one before? Read on.

Last Wednesday, January 2nd, as the 20th Knesset breathed its last before flatlining in the run-up to a General Election, the Finance Committee approved regulations paving the way for the introduction of the international ‘Standard for Automatic Exchange of Financial Account Information in Tax Matters’.

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Game over

The New World Order, where there is nowhere for the less-than-honest to hide their ill-gotten gains, has been heading this way to much fanfare for some time. Too long, in fact. Israel signed on to the G20/OECD 2014 initiative early on, and was committed to having the necessary legislation in place by January 1st 2017. This was to be followed by necessary bi- or multilateral agreements (it committed to two multilateral ones), necessary bilateral commitments to ensure  the other side would respect confidentiality – as well as being both legislatively and operationally sound – and technical guidance to Israel’s banks on how to provide data on accounts of foreign resident in standard international format (so they could be easily deciphered at the other end). Information exchange was to start in September 2018. In fairness, Israel didn’t score too badly other than on one rather critical point – although legislation was in place in mid-2016, well in time for the 2017 deadline, it could not come into force until accompanying regulations took effect.

Well, as the naysayers would have it, a miss is as good as a mile and the road to hell is paved with good intentions. By December 2018, there were only seven countries that were non-compliant: Antigua & Barbados, Brunei Darusallam, Dominica, Niue (is that a country or a spelling mistake?), Qatar, Sint Maarten and … Israel. This prompted a desperate letter from the secretary-general of the OECD to Israel’s prime minister, and the eleventh hour passing of the regulations last week, exactly two years and one day late. If you are going to be late, you might as well do it in style.

What went wrong?

The required regulations, as the American FATCA information exchange regulations before them, hacked at one of the mainstays of ultra-Orthodox society (and a much valued traditional Jewish institution)  – the ‘Gemach’. The concept is a simple one. Groups of largely anonymous donors provide money to an intermediary who generally disburses the funds as interest free loans to those in need. In the event the borrower is unable to repay, the donors (who have generally kissed goodbye to the money) have no recourse. Until now, these arrangements have had no legal or regulatory basis – essentially private arrangements that could run into incredibly large sums. When FATCA came along, Israel’s banks started closing Gemach accounts as they were unable to verify to the US authorities that there were no US ‘depositors’. On the other hand, as the chairman of the Finance Committee repeatedly protested, requiring a donor who gets nothing other than a place in Heaven out of the whole process to fill in forms for the tax authority is a kiss of death for the institutions.

A solution was found, with the evident acquiescence of the US authorities, for small Gemachim, and in August 2016 Gemachim generally were given two years grace, in which time they would – against their will – be brought under regulation, and they could organize their affairs to be compliant for the banks. To cut a long story short, after a lot of weeping and gnashing of teeth, including the flat refusal of the Bank of Israel and Capital Markets Authority to supervise them (The Capital Markets Authority lost, and ‘won’ the job), the very last piece of legislation to pass its third reading in the 20th Knesset was the attrition-much-reduced Gemachim Law, which paved the way for the Chairman of the Finance Committee to agree to approve the information exchange regulations.

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The only thing crooked about him

Had the script of this farce been written by the 2008 financial crash’s moral voice, then Archbishop of Canterbury Rowan Williams, the Finance Committee and Israel might have walked away with their heads held high. Williams had maintained that the ‘markets’ that bankers claimed dictated the path of the financial system, were – in Judeo-Christian – terms a form of idolatry, something man-made being attributed independent powers. He argued that modern financial transactions lacked the face-to-face component of yesteryear – it is much easier to default when lenders are obscured behind a curtain of intermediate transactions than when recognized at an individual or community level. Here were self-regulating funds that should not be collateral damage in the post-2008 meltdown regulatory war against the unfettered avarice of the players in the financial markets.

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There are always the traditional methods

However, Anglicanism hasn’t had much of a look-in around these parts since 1948, and  the ‘guilty’ Knesset Finance Committee was chaired until last week by an ultra-Orthodox rabbi-politician not given to philosophical musings, but rather to horse-trading in the name of his flock. The reason there was a need for a law regulating the Gemachim was that a number of them, predominantly in the United States and Israel,  had been the facilitators of big-time money laundering and tax evasion. A war of attrition in the long process of arriving at the final wording,  holding the inevitable (and, hence, unforgiveably late) information exchange regulations hostage,  is considered  to have severely compromised the regulatory effect of the law. Any collateral damage ultimately suffered by the moral majority of Gemachim is thanks, therefore, to the unsavoury dealings of some of their number, rather than the excesses of the financial system.

The last weak joke of the 20th Knesset…

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