Tax Break

John Fisher, international tax consultant

Archive for the category “Israel”

Service and tax included

You get the idea

Around the turn of the century, British left-wing tabloid, The Daily Mirror, had a very short-lived flirtation with serious journalism, signified by the change of its banner from red to black, and the use of words like ‘proletariat’ instead of ‘sex’.  One of the serious broadsheets ran an editorial a few days into the experiment stating that the Mirror had ‘gone from talking bollocks about trivial things, to talking bollocks about serious things’. As is being proven once again in the contest for the Democrat to challenge President Trump next year, a socialist message is much harder to formulate and get across than a conservative one.

When it comes to taxation, income taxation – in its modern guise – has socialist leanings (even in conservative societies). It is a progressive tax that seeks fairness with redistribution of income between the wealthiest and the poorest. As such, it is also a complex tax that is the Play-Doh of tax advisors who juggle, shape and interpret it. VAT, on the other hand, is a regressive tax that broadly comes in one-size-for-all, take it or leave it (and if you leave it –risk going to jail).

We were reminded of the primitivism of the specific Israeli incarnation of Value Added Tax last week, in a court decision in which the judge made very clear that, despite her desire for fairness, her hands were tied by a law that – though she would never have used the term – is an ass. And an expensive ass, at that.

Israel, like most countries operating a VAT system, does not insist on VAT being charged on exports or services to foreign residents. The reasoning is simple – to improve competitiveness with foreigners. Way back, the Israeli legislature saw fit to include an exception regarding services, ‘if the subject of the agreement is the provision of a service in practice to an Israeli resident in Israel’.  Fair dinkum. There was no justification for unfairly improving competitiveness with other Israelis.

Tax planning doesn’t always go right

But, not satisfied with their status as children of a lesser god,  VAT practitioners thought they could juggle and shape the Play Doh. What if the service was partially for a foreign resident and partially for an Israeli? If the amount were charged abroad, VAT would be an emphatic – and hardly fair – zero.

So, following a court decision around the time the Daily Mirror was making a fool of itself, the legislature tightened the wording to, ‘if the subject of the agreement is the provision of a service in practice, in addition to a foreign resident, to an Israeli resident in Israel’.

And that is why laws are far too important to be left in the hands of lawmakers.

The result was a car crash. The exporter was to be sacrificed on the altar of obsession – the car chase between the tax authorities and smart-arse tax avoiders, where collateral deaths were just an unfortunate statistic. As soon as there was any trace of an Israeli recipient of a service, the whole charge – lock, stock and barrel – was to attract VAT.

The latest case last week, in which the only good news for the appellant was that the judge limited costs, did allow for the possibility of negligible or subordinate services sneaking through. But, the rest of the news was grim.

Being nicked for VAT is not a joke

What it all means is that, until such time as the legislature (which has been in suspended animation throughout 2019) hopefully listens to the judge and gets its act together, the reinvigorated VAT authorities are likely to be on the prowl for those charging  zero rate VAT without legal justification. Conservatives are, after all,  all about law and order.

Leaving (eventually) on a jetplane

It’s got a better chance

With a month to go until Christmas, this is around the time post offices are bombarded with envelopes addressed to ‘Santa Claus, Roof of the World, c/o Lapland’. Not a postal code in sight. And each year, there are heartwarming stories in the press of whip-rounds among local staff to fulfill the dreams of the least fortunate of the young correspondents.

A High Court decision a fortnight ago, and an article in the financial press last week, reminded me of my own Neverland  letter several years ago. Had the indignant tax authority junior clerk who called me when it was dumped on her desk been Father Christmas, I would have stopped believing in him there and then.

Trying to make sense of the system

The trigger was a foreign multinational corporate client that reorganized its holding structure which included an Israeli subsidiary. According to both treaty and domestic law, the transaction was not taxable in Israel. However, there is a section in the law that requires the sale of an asset to be reported to the relevant local tax assessing officer within 30 days. Non-reporting carries the horrendous penalty of……nothing. However, always a stickler for telling clients to do the right thing, I informed the parent company that we would be filing the form on time. The only problem was that the foreign client didn’t have a tax number, let alone an assessing officer.

So, I wrote a very nice narrative of the transaction, stuck it in an envelope addressed to ‘Assessing Officer, The Income Tax Authority’ together with the required form, and dropped it off at the authority’s Tel Aviv reception desk, making sure to have the desk clerk stamp my copy ‘received’.

About a month later, I received the above-mentioned irate call from the poor lady on whom, having toppled down the entire hierarchy, the letter had landed.

‘What am I supposed to do with it?’

‘I don’t know.’

‘You are wasting my time. Come and collect it.’

‘No’

‘OK – I am going to send it back to you.’

‘As you wish. But please don’t trouble yourself.’

‘So, I will chuck it in the bin.’

‘As you wish.’

Phone slammed down.

I didn’t care. I had my precious ‘received’ stamp, and that was all that was important to me – I had reported. And, if I hadn’t reported nothing would have happened either.

Some people will do anything to get away

The law’s lack of teeth is also a characteristic of Israel’s Exit Tax. A resident ditching his or her tax residence is liable to capital gains tax on, broadly, assets held outside Israel (most assets held in Israel will be caught when sold). The law has been in force since early in the century but reporting such gains is rare. Why? Because, there is a choice to pay the tax on leaving the country, or to defer the tax until the asset is actually sold, then paying tax on a proportion of the gain according to a linear calculation pre and post emigration. But, by that time, the assessee could be sunning himself on Miami Beach, not too worried about being chased on the matter. November 11th saw the culmination of 4 years of court proceedings regarding exit tax charged to someone who was inexplicably caught (or, alternatively, suffering from some kind of death wish or pang of conscience, walked into the tax authority and gave himself up). The upshot was that, there having been two court cases at the district court level, the High Court judges issued a judgment about as short as the writing on the back of an average movie ticket. Surprise, surprise – Income Tax Authority 1 Man-In-The-Street 0.

A few days later the country’s main financial newspaper ran an ‘exclusive’ article (mercifully, without compromising pictures of the Tax Commissioner) that the tax authority was working with its dentists to apply teeth to the law. The only thing for sure is that none of the theories put forward by the learned professionals interviewed will be the ultimate solution. That would be too simple. One thing is for sure, the going is going to get a lot tougher for those leaving the country permanently or semi-permanently.

And despite that ultimate court decision being given on the eleventh day of the eleventh month, it won’t be over by Christmas.

No laughing matter

Gallows humor

The masters of smalltalk have to be taxi drivers, barbers and publicans (Google translate: barkeepers). I have wondered for decades what humorous stories publican Albert Pierrepoint shared with his appreciative clientele, as they handed over their shillings encouraging him with the words, “And one for yourself”.

For Pierrepoint had an interesting sideline – he was Britain’s public executioner of choice. Some of the most notorious villains of the 20th century passed through his rope until he hung up his boots in 1956. If the stories are to be believed, he never treated that work as a laughing matter, and – indeed – even once had to hang one of his own customers with whom he had regularly sung duets across the bar.

A short, disagreeable piece on the Israel Tax Authority’s website made me think of Pierrepoint the other day. In an attempt at humour, a report of the results of a spot audit at two of Tel Aviv’s open air food markets was laced with quotes from the caught-red-handed miscreants: ‘ I am careful to register sales but I am after an accident and take pills.’ ‘The paper roll on the till ran out and, just as you arrived, I put in a new one.’ ‘My accountant told me I don’t need to register credit card transactions, only cash ones.’

Now, apart from none of these lines being side-splittingly funny (it IS a tax authority website, after all), there is an element of gratuitous cruelty or, at minimum, a lack of sensitivity. This was not an edition of Candid Camera. As American humorist Dave Barry once wrote after being selected for random audit by the IRS: ‘Remember that, even though income taxes can be a “pain in the neck,” the folks at the IRS are regular people just like you, except that they can destroy your life.’ What did the inspectors expect the panicked market stallholders to say?

I cannot help but believe this is all about the modern world’s obsession with self-promotion. Gone are the days when people with naturally anonymous occupations (like tax inspectors and accountants) beavered away anonymously – their reputation earned for their true professionalism rather than their vacuous razzmatazz.

Years ago, I happened to be at one of Tel Aviv’s main tax offices when a middle-aged man – having evidently been told that he was to be hung out to dry due to chronic non-payment of taxes – went crazy. The inspector was about to call security, when the soon-to-retire Chief Collection Officer came out of his private office, put his arm around the individual, said some soothing words and led him into his office where he offered him a coffee. However much the individual was in the wrong, the tax official understood his distress.

The tax authority’s money is hung out to dry

So, if you want to make fun of somebody, how about the Globes newspaper report the other day that the Israeli Tax Authority is unable to collect as much as a billion shekels from foreign assessees because neither the Bank of Israel nor the commercial banks are willing to facilitate payment of, what might be, laundered funds? A case of ‘hoisted with their own petard’? What a joke.

Lost before translation

Balfour was Prime Minister, Foreign Secretary AND looked like John Cleese

At a conference in Lisbon a few years back, I listened to a delightfully amusing talk by a former British Foreign Secretary (who is NOT now Prime Minister). He mentioned a near diplomatic incident some years earlier when he was speaking at a dinner in Japan. His quote from Matthew: ‘The spirit is willing, but the flesh is weak’ was translated as: ‘The whisky is good, but the meat is terrible’.

We have all smirked at some time or other over images of South East Asian signs ostensibly in English. The funny side is, however, sometimes lost when it comes to assembly instructions for cheap goods ordered over the internet from faraway lands, when we toil into the night trying to assemble them. The frustration is only exacerbated when we realize that some of the parts are missing or don’t fit, and there is nowhere to turn this side of Suez. (I would point out that last comment is not strictly true in my personal case). The High Street store has life in it yet.

Israel – the Start-Up Nation – prides itself on very expensive exports with excellent instructions (often an expert team sent abroad to install the very latest technology). On the other hand, we are still East of Suez, so something has to give in our relations with foreigners, the people who happen to make up most of the world.

An excellent example is Israeli trusts and their reporting requirements. The only thing the forms are missing is a label on the back stating: ‘Mad in Bangladesh’.

In case you’ve never seen it

By now, everybody knows that Israel’s fairly new trust tax law doesn’t fit reality. Gallant efforts by the tax authorities (and I mean that most sincerely, folks) to try and produce sensible practice out of it, most clearly resembles attempting to  sew Mama Cass into Marilyn Monroe’s ‘Happy Birthday, Mr President’ slinky dress.

In the last week alone, I was faced with two reporting howlers.

A trustee needed to report the formation of an Israeli resident trust. This would – according to the forms – inexplicably normally be done by the settlor. But, in accordance with the law, a trust that has been decanted from an existing trust looks to the settlor of the parent trust as the settlor. As is often the case in these circumstances, the settlor was in no position to file the forms because he was already dead. Choosing between a number of irrelevant options, the reporting accountant took a bash and ticked a vaguely relevant box. I was amazed when the trust’s  foreign advisor told me they were wrong, and pointed me to the ‘right’ box. And – in the world of wonky instructions for third world products – he was right. The English translation fitted the trust precisely. The only problem was – it was not a faithful translation of the official Hebrew which unfitted the trust precisely.

And then, I had to break the news to someone else that there is no form (I also thought there was, until I read them all in detail) for beneficiaries receiving cash distributions from a relatives’ trust on the 30% tax on distribution route. It isn’t really surprising – logic and intelligent interpretation of the law require tax on such distributions to be paid by the trustee, but the tax authority’s explanatory circular, as well as forms to be completed by the trustee, places the payment obligation on the beneficiary. On that basis, the reporting by the trustee is purely informative and no active tax file is opened. In the absence of access to the financial data of the trust (which is in the hands of the trustees), the beneficiaries cannot challenge the full 30% taxation on their distribution (the tax authorities talk loosely of the trustee convincing them – but, in their official eyes, what has he go to do with the price of cheese?), so there is already a mess. This is exacerbated by the fact that the line on the actual tax return for distributions from trusts is for both ‘liable’ and ‘exempt’ trusts. These terms have no meaning in Israeli trust tax law – but whatever they do mean (and I have my suspicions), without an accompanying form the tax authority cannot know who should be paying the tax (the trustee or the beneficiary). AND THERE IS NO FORM!

Tax returns in Israel are filed electronically. The days of the nice letter from Mrs Trellis of North Tel Aviv  to the nice tax clerk explaining the situation are over.

At a dinner in Tel Aviv a couple of years back, I listened to a delightfully amusing talk by a former British Foreign Secretary (who IS now Prime Minister). He referred to the residents of Bromley being a credit to their favourite son (or words to that effect). I turned to the British expatriate next to me and pointed out that Bromley’s favourite son was Charles Darwin. Reminds me of something, but I can’t (or should I say won’t?) put my finger on it.

The Judgment

Where should I go to work?

To me, Israel’s National Insurance Institute is one of the last bastions of socialism in our essentially free-market economy. Despite legislation by the freely elected Knesset, it has always appeared to operate according to its own rules. Indeed, over an international tax career in this country spanning three decades, I was so confused that, when I would finish dealing  with the tax consequences of anyone going to work abroad  (and in this Start-up Nation, LOTS of Israelis go to work abroad), I would reach a point where I would simply tell them to visit their local NII office, provide a full explanation of their plans, and accept whatever they told them to do. That invariably resulted in a minimum (and I mean, minimum) monthly payment. When I did try to wade in – once sending not one, but two official letters for a ruling to two relevant addresses – I received two diametrically opposed answers.

The saddest thing of all is that the law is perfectly clear on the matter – an Israeli resident working abroad (unless governed by a Totalization – avoidance of double payment – Agreement between the two governments) is liable to full national insurance contributions on his or her income.

For decades the law might have been law, but bureaucracy was bureaucracy, and – as in any good socialist society – bureaucracy trumps law.

An appeal has just been heard to a case that was brought before a regional labor court back in 2017. The result is Kafkaesque. Hold onto your caps, comrades.

‘I am a faceless bureaucrat’

The case involved an individual who had gone to work abroad in 2009 and 2010 for a foreign employer. He did what any good free-marketeer (or even socialist) would have done at the time, and – on his tax advisors’ advice – trundled off to his local branch of the People’s Republic of National Insurance. They told him – as they did to countless others – that he would be required to pay minimum monthly payments during his sojourn abroad.

Four years after his return he received a (metaphorical) knock on the door from the men in raincoats telling him to pay up maximum (not nominal) amounts on the time abroad. The men in raincoats – as opposed to the bureaucrats manning the local offices of their Institute – clearly knew the law. The individual went to court.

In 2017, the labor court found in favor the little man. The judge sympathized with the plaintiff’s argument that, whatever the law, the clear practice of the Institute at the time was to charge the minimum amount. It even turned out that, when the NII dealt with the intrinsic problem in 2014 (a year conveniently sandwiched between the transgression and the claim for back payments) the reason for their cockeyed policy became apparent. There are three classifications for National Insurance – self-employed worker, employed worker, and not employed and not self-employed worker (‘worker’ is in the original, comrade). The first and last are required to pay over their own contributions; the second transfers obligation to pay to the worker’s employer. Foreign employers couldn’t be expected to pay the contributions, so workers in foreign employment were shoe-horned into the third category, which called for minimum payments. The judgement also made a big deal of the amount of time it had taken the NII to get to the individual, given that he had come clean prior to taking up the position.

Well, the appeal at the end of July, which took two long years to be heard, overturned the lower court’s position. The fact that the National Insurance Institute didn’t know its head from its backside was not a reason to relieve the individual of the need to pay – even years after the event. The Kafkaesque bit was that the judge even implied that – knowing the correct law – the individual should have come forward, reported, and paid. (In practice, the income tax authorities share the income tax assessment with the NII, and that is how liability is determined countrywide. Strictly, however, the reporting of that income to the NII is incumbent on the assessee).

Now, I don’t know the last time this judge turned up at a government office and told the bureaucrat behind the desk that – despite a clear monthly liability – they have got it wrong and they demand to pay more. I see the following scenarios:

  • The bureaucrat telling them in no uncertain terms to kindly stop wasting their time while looking around for the hidden Candid Camera.
  • The bureaucrat opening up an investigation into the individual’s affairs to find out how much they REALLY owe.
  • The bureaucrat calling the men in white coats (as opposed to raincoats, this time) to cart the individual off to a place their employer will never find them.

In Yiddish folklore, there is a town full of fools called Chelm.

When tax legislation bombs

Why did the RAF bother?

In his bestelling book, ‘Churchill’s Ministry of Ungentlemanly Warfare’, Giles Milton tells the story of the destruction of Peugeot’s factory in Occupied France. The facility had been commandeered for German military production. One night, Bomber Command ordered the dropping of a massive amount of ordnance on the plant, only to discover the following day that they had missed their target completely and, instead, razed a number of French villages with several hundred innocent civilians providing a tragic statistic of ‘collateral damage’. The next attempt, which was as successful as the bombing raid had been a disaster, involved a handful of saboteurs placing plastic explosive at key points in the building.

Israel’s trust tax provisions, that largely took effect in 2006, could have been orchestrated by Sir Arthur ‘Bomber’ Harris himself. They are so far from perfect that they look like   the Knesset Finance Committee opened its bomb hatches and peppered them over the taxpaying public. It is well known that the authorities were so concerned about the capacity to use trusts to evade taxes, that they legislated to nab the heinous few, while causing collateral damage across the local and international economy.

Sifting through the debris, an example of legislation that appears to have been totally lacking in precision is the instruction that ‘the provisions of the third chapter of Section III’ will not apply to trusts. References like that are what Churchill might have called, ‘ A riddle wrapped in a mystery inside an enigma’ – obscure enough to be missed by anyone but the most obsessive tax wallah. Well, lo and behold, the chapter’s sections deal with the very human provisions of deductions and credits, such as those applying to pensions and the personal status of the individual – the stuff that amorphous trusts should be rightly excluded from. Indeed, the tax authority’s explanatory circular gives such items as the examples.

Bah humbug

However, somebody at the drafting stage obviously became bored, and didn’t notice the tax credit for charitable donations tucked away in the chapter. An individual is entitled to a 35% tax credit for donations to Israeli recognized institutions up to the lower of 30% of taxable income and around 9.2 million shekels. That is quite an incentive to donate. The trouble is that, according to the law, a trust (technically, the trustee) – that pays tax in Israel like an individual – cannot avail itself of that credit.

There is collateral damage, and there is collateral damage. Trusts , by character if not by definition, make charitable donations. In countries where tax efficient, those donations might be by way of making the charitable body a beneficiary. But, in Israel there is generally no tax on distributions anyway – the tax is on the annually earned income. So, by denying benefits at the trust’s taxable income level, they are being denied absolutely.

The bottom line is that it is not tax efficient for trusts to make charitable donations. That smacks less of collateral damage, and more of insane carpet bombing. It is almost as crazy as the Germans deciding to make their vehicles in France, and putting a man by the name of Porsche in charge of  the Peugeot factory.

Succinct summary

As WWII proved, it’s a mad, mad, mad, mad world.

Trust the taxman?

Perhaps not as bumbling an idiot as he looked…

My first suspicion that authority wasn’t all it was cracked up to be was at the age of 10, when I saw Lionel Bart’s newly released Oliver! Between the catchy numbers and faux-dirty actors there were two clear messages – the inhumanity of the workhouse system and Mr Bumble’s ‘The law is a ass, a idiot.’

Workhouses had blessedly long gone even then, but I have had many occasions in my long career to echo Mr Bumble’s sentiment. And if Dickens meant the term ‘ass’ in its asinine sense,  I am sometimes tempted to go with the American usage.

There have been many occasions when a sloppily drafted law has been saved by the tax authority, with liberal and, sometimes, downright anarchical interpretations that could only be strictly justified by a completely new interpretation of the letters of the alphabet used in the drafting.

There are often a lot more forms than substance

But, more often than not, it is not the case. While they will invoke ‘substance over form’ in incidences to their advantage – fairly confident that the courts will back them up if matters get that far – the authorities will fight hammer and nail to impose the letter of the law, hiding (possibly fairly) behind the excuse that they cannot ignore the written word.

And, just occasionally, they go a step too far.

If we are to believe the myriad reports of a case at the end of July, one of those steps is on the way.

I won’t dwell on the details of the case which has already been reported to saturation point, but suffice it so say, trust tax law – largely legislated with effect from 2006 – generally considers the contribution of an asset to a trust as a non-taxable event (a gross oversimplification, if ever there were one). The problem is that, for purely anachronistic reasons, Israel has a separate law for the capital gains from local real estate transactions. It, and its predecessor, simply predated Israel’s taxation of capital gains and for reasons I sadly suspect many of us understand, the situation has never been put right. The real estate law stayed silent beyond some existing archaic provisions that were essential for real estate transactions. The taxpayer argued that the transfer of real estate to a trust should not be a tax event – in logical line with the treatment of all other assets, as must have been the clear intention of the legislator – and the tax authority disagreed.

Blessedly, the committee appointed under the law  to hear the appeal of the taxpayer, comprising two respected accountants and a senior judge, found in favour of the appellant. The ruling was reasoned and well-presented doing what I, in my recurring naivety, thought  was what the tax authorities found difficulty with – filling in by stealth the missing bits of the law that should have been, but were not, there.

I assumed that would be it. The tax authorities were given a peg on which to hang their coat, and the world could carry on. The judge even recommended that the legislature add the relevant provisions to the statute so as not to permanently be required to rely on case law.

Dickens was quite obsessed with the failings of the legal system

Well, according to the professional ‘press’, I got it wrong. The tax authority is expected to blow a raspberry at the decision and pursue an appeal in the High Court.  Apart from the relative certainty that they won’t win, I don’t begin to understand what they are reported to be contemplating.

It would simply not be fair.

Hoisted with their own petard

The good old days

In Tudor times it was traditional for condemned gentlemen to pay their own executioner. The equivalent in my world is the statutory requirement to report any of a series of positions taken in a tax return that the tax authorities do not agree with. The tax inspector no longer needs the deductive powers of a gumshoe – he or she can just sit in the comfort of their torture chamber picking their victims off one by one. The good news is that you need to be making quite a packet from your planning to be forced to the block – 5 million shekels in the current year or 10 million shekels over 4 years. The bad news is that there are 57 varieties (or positions) to choose from.

Although the list came out in December last year, the form for reporting – which is just really an index of the December headings, and could have been put together in half one of the many hours saved investigating – finally hit the presses earlier this month, just in time for some to miss the filing date of their  tax returns. What is most interesting is that most of the ‘positions’ could better be described as the ‘law’. The tax authorities seem to have taken a leaf out of US Immigration and Customs Enforcement‘s book: ‘Do you seek to engage in or have you ever engaged in terrorist activities, espionage, sabotage, or genocide?’ Like someone is going to announce they have been evading tax.

Some parents live in obscure faraway lands

However, one that caught my eye concerned the profit to be reported on the sale of trust assets. The pronouncement by the authorities (already back in 2017) was not controversial – the sale of an asset that had started life outside the Israeli tax net was subject to capital gains tax on the full gain – painful, but common international practice (and the clear law). The explanatory notes, however, included an exception relating to ‘Relatives Trusts’.  When the legislature took its last swing of the axe at trust tax planning in 2013 making everything taxable, there was one small sweetener. While distributions to Israeli beneficiaries would face a tax bill, Ma and Pa who had set up trusts in the obscure faraway lands where they still lived, would – together with their trustees – be largely let off the hook from reporting in years when distributions were not made (unless they chose otherwise). The explanatory notes spread the bonhomie further by making clear that relatives trusts set up before 2003 would get a step-up in value for capital gains tax purposes to January 1 of that year. The explantory notes were cross-referenced to the tax authority’s notes on the trust law. The only problem was, they didn’t fit. Where did 2003 come from? In fact, what the blazes did 2003 have to do with trusts at all – It was the one area actively ignored in the great tax reform of that year. The explanatory notes were silent.

They could always try and take it with them

But, if we are already talking about relatives trusts, there is sadly no happy ending. The authorities were nice to Ma and Pa. They even decided not to mess things up until not one, but both, of them were safely tucked up in their faraway graves. Then the fun would start. A relatives trust would become an Israeli resident trust – facing full taxation even of the bits heading to foreign siblings. While there were regulations offering solutions (potentially painful) for trusts to carve out foreign beneficiaries’ income from the Israeli tax system, the wording didn’t comfortably include relatives trusts which started life as something statutorily amorphous.

So, as with so much in Israeli tax law, assessees grieving their parents now find themselves at the mercy of the tax authority. In fairness, the authorities do their best to produce a sharp result from blunt legislation. But it can take a lot longer than a Tudor treason trial.

Relatives trusts need tender loving care if their beneficiaries are to avoid the ignominy of the scaffold.

An actor walks into a Bar

Not all Penguin books made it to court

At Penguin Books’ 1960 obscenity trial in the matter of DH Lawrence’s steamy novel ‘Lady Chatterley’s Lover’, the prosecuting counsel famously asked the jury of randomly picked men and women, ‘Is it a book that you would even wish your wife or your servants to read?’ The jury found in favor of the publishers, and both the judge and prosecuting counsel were laughed out of court, as out of touch with the modern world.

The appeal filed last week by supermodel Bar Refaeli’s lawyers against a decision of an Israeli District Court to side with the tax authorities in her disputed claim of  non-Israeli tax residence, appeared to suggest that the judge had also not learnt to move with the times. It argued that, had Refaeli been married to American actor Leonardo DiCaprio, rather than simply living with him in the U.S., there would have been no question that her center of life, and hence tax residence, was outside Israel. His Honor’s failure to recognize her ability to maintain her Israeli connections – while not her residence – in a world of social media, cheap telecommunications and affordable air travel was also seen as archaic.

However, as opposed to the Penguin prosecutor, who really did seem to have fallen out of the Downton Abbey woodwork, the judge was receiving some pretty unfair press here.

Hardly the first actor to walk around in a hat

When he was trying to get to the bottom of the couple’s relationship, the judge heard quite a bit of bizarre stuff from witnesses including Refaeli’s mother and a bosom-friend actress, whose embarrassing incoherence on the obscure subject of DiCaprio’s ubiquitous hat, as well as his lack of intimate communication with the supermodel’s friends, left me wondering whether actors are programmed never to come up with their own lines. (This, of course, was not a problem for Refaeli, who – thanks to the way she is programmed – doesn’t need to communicate verbally at all).

The issue that really needs to be examined is whether superstars should be treated like the rest of us at all when it comes to taxes.

Once upon a time, it was the aristocracy that filled the ranks of superstardom. Monarchs, who until not so long ago were considered to rule by Divine right, have not traditionally paid taxes. The Queen (there are many queens, but only one Queen) has paid some tax VOLUNTARILY since the early nineties, but she could change her mind if the housekeeping bill got out of control. Here in Israel, with a wink to the British Mandate, the president is exempt from tax on his presidential income.

Back in 1923, Virginia Woolf’s Mrs. Dalloway wondered excitedly– along with everyone else in sight – whether the mysterious occupant of a blacked-out limousine was the Prince of Wales, Britain’s future king. Faced with a similar scene in 1999, the Mrs. Dalloway of Michael Cunningham’s tribute novel, ‘The Hours’, hoped it might be Meryl Streep.

Divinity has passed to the superstars. Their irregular conjugal behavior – which the judge found hard to comprehend – is perhaps because they are extra-terrestrial beings, flitting from country to country and not bound by the rules of us mere mortals.

Even the OECD’s  model convention on double taxation singles out sportsmen and entertainers as the only professions with a specific article (17) to deal with their out-of-the-ordinary  international tax issues.

A sensible solution, based in part on Article 17, might be to only tax these gods and godesses in the countries where they work – one day here, one day there etc., without assigning them a tax residence. The downside would be that – thanks to those in my profession – before long, all movies would be made, and sports events held, in countries where there was no income tax.

Where shall we do this scene?

The movies could get over the obvious problem of ‘location, location, location’ with the latest CGI technology. But what about sports? Have you ever thought about zero income tax Qatar for the 2022 Football World Cup?  Not a blade of grass or pint of beer in sight. But, there will be. In abundance.

In the absence of  a foolproof alternative, it is probably wise to treat them like the rest of us. I believe that is what the judge was trying to do.

 

English as a very foreign language

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One word would have been a start.

Several years ago, I returned from a quick trip to Paris on El Al Business Class. As everybody knows, El Al’s security measures are peerless, but just before the gate at Orly airport, the French insisted on putting us all through a second metal detector. I buzzed. Now, I am a big believer that there can’t be too much security, and would normally have been happily compliant as they played hide and seek with my belt and shoe heels (this was before shoe heels were a real security item). But this was France. And this was a security officer pulling on white gloves. And he was French. He barked at me in his Gallic tongue, and – despite five wasted years at school doing my bit for the Entente Cordiale – I just looked at him like a gentleman would look at a barking puppy. He barked again – and that was it; I flipped:

‘Speak to me in English! There is only one international language today, and you will speak to me in it!’

He barked again, this time signaling I should turn around. Not likely with those damned white gloves, Pierre!

I then did something rather disingenuous for the first and only time in my life:

‘I am an Israeli. I speak English. Why don’t you?’

At this point, the El Al security officer who had interviewed me earlier, and had suffered my heavily accented Hebrew, together with her two colleagues who were standing nearby, actually burst out laughing.  Suffice to say, not wishing to spend the weekend in the Bastille, I did ultimately comply. I have no idea why he wore the white gloves – he went nowhere near my Maginot Line.

What made me raise this now in a tax blog? A few weeks ago, the OECD uploaded the latest version of Israel’s Transfer Pricing Country Profile. The document involves, in the main, ‘yes’ or ‘no’ answers with a space for the reference in statute law. So far, so good. But, here and there, a few short sentences are necessary. Aye, and there’s the rub.

lets_eat_grandmaHardly any of it was in grammatical English. I had difficulty even understanding some of the sentences.

This is a disgrace, and I don’t think it is restricted to Israel.

One of the principal reasons the OECD has been able to advance its BEPS international tax agenda so efficiently is that the world has learnt to communicate in a common language. This is not about triumph or ego. It is about efficiency.

And, of course, the advantages go far, far beyond tax. There really is no reason today why the sine qua non for any function in the international sphere should not be relative fluency in English. The only exception would be a prime minister or president who is elected by the people (mind you, the current president of France seems to have a better command of English than the current president of the United States.)

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My fecund imagination is starting to run away with itself

And, as for the written word, if I were the OECD, I would put red ink all over the Israeli (and any other unacceptable) entry and send it back marked; ‘Not good enough. Try again’. That is how we learnt English in school.  The stick also helped – but I wouldn’t put that in the hands of any organization based in Paris.

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