Tax Break

John Fisher, international tax consultant

Archive for the tag “humor”

The postman doesn’t even ring once

Welcome to the
Circumlocution Office

Charles Dickens spent much of his literary career railing against the demonic effects of 19th century bureaucracy. He could just as well have been writing today. Unfortunately, now as then, most of us obediently accept the nonsense thrown at us by the nation’s institutions, because – once solved – we don’t have the time, patience or money to attempt to bring the perpetrators of our suffering to account.

It was, therefore, particularly gratifying to see a court decision a couple of weeks back in which the little guy won against the Israeli Tax Authority over an issue that has affected most of us at some point in our lives.

There is a particularly nefarious right and practice of the Israel Tax Authority and the National Insurance Institute to freeze bank accounts of anybody who they consider owes them money. Sometimes they get it right, sometimes they get it wrong.

A resident of Northern Israel was surprised one day to discover that his bank account was frozen, and cheques were being returned and standing orders refused. When, after a number of visits to his local tax office, he finally convinced them that the $1500 (fifteen hundred dollars!!!) was owed for non-filing of a tax return that he probably shouldn’t have been required to file at all, they cancelled the fine, and released the funds. However, the damage had been done. He had been humiliated before his creditors.

The individual sued the tax authority for defamation.

Official mail goes through
too many hands

The case revolved around the local postman. The authorities claimed that they had sent warnings to the plaintiff before opting for their last resort. The plaintiff parried their claim by proving that they hadn’t used his full address, and he had thus never received the warnings. Called to give evidence, the local postman said that there were lots of people in the town that had the same name and while, in the good old days, he would have found ways of matching the letter with the person, since 2007 he was under instruction from head office to just ‘return to sender, address unknown’.

The individual was awarded around $1700 in damages, in keeping with the entirely petty nature of all the sums involved.

The tax authority will, hopefully, now tighten their procedures and fewer of us will suffer unjustifiably at their hands. However, in the third decade of the 21st century, it is surely time to rein in this overzealous bureaucracy and its step-brother, the National Insurance Institute. Apart from examining whether they should have a greater right than any other creditor to freeze assets, they should be forbidden from using such sledgehammer tactics for debts under a certain, material, amount. But, most of all, the doomed-to-fail blind reliance of one bureaucracy on another has to stop. In this case, serendipitously, the tax authorities did not use the plaintiff’s full address, so the post office was off the hook. I dread to think what the outcome of the case might have been had the facts been different.

‘It’s not much of a cheese shop, is it?’

I need only mention a personal experience five years ago when I needed to send my British passport and accompanying documents  to the UK for renewal. Having waited forty- five minutes in the queue at the local post office, I presented the meticulously correctly addressed parcel to the person behind the counter.

‘Is it important it gets there?’ was her opening salvo.

‘Definitely – it is my passport,’ I answered truthfully.

‘In that case, I suggest you send it DHL.’

Doing my best John Cleeseian impersonation (not very good), I turned and theatrically surveyed the entire room. Turning back to her, I ventured,

‘It’s not much of a  post office, is it?’

Bottom line – there should be no freezing of accounts before a registered letter has been sent and the tax authority has checked that it has been received. Alternatively, a foolproof electronic procedure should be found, obviating the interference of the post office entirely. People’s reputations are precious.

The plaintiff in the above case could have quoted Sydney Carton in A Tale of Two Cities: ‘It is a far, far better thing that I do, than I have ever done.’ What the Dickens!

The People’s Court

Who dunnit?

This year marks the 50th anniversary of the first performance of the classic satirical farce ‘Accidental Death of an Anarchist’, in which two policeman under investigation for the death of a suspect in their custody weave a web of increasingly improbable explanations as to how he fell out of the interrogation room window.

I don’t know what just made me think (nostalgically) of the play, but there was a Tel Aviv District Court decision about 10 days ago that, quite coincidentally, brought a coast to coast smile to my wizened face.

It is actually an old story, originating with a decision by the same judge in 2016 that, on appeal, was ping-ponged back to him for further thought by the High Court . Well, he thought again and spent 63 pages sharing those thoughts, coming to the same conclusion as the first time – the little man was right, and the tax authorities were wrong.

To cut to the chase, the case involved a group of investors who jointly held shares through a foreign holding company (in fact, two foreign holding companies, but let’s not confuse ourselves with irrelevant facts) in a foreign trading company that eventually went public. The foreign holding company was in one of those fungible, fun exotic getaways – The Turks and Caicos Islands, completing a structure that was popular at the time of the company’s creation before Israel abandoned its territorial basis of taxation in 2003.

In case you haven’t seen one.

Stuck with a Doctor Dolittle Pushmi-Pullyu situation, where shareholders had to effectively sell shares in the traded company together via the holding company, their accountant approached the Israeli tax authority to rule that shares of the trading company transferred to the individual shareholders would only be taxable on their sale. The guys at the tax authority were willing to listen. They accepted that the holding company was merely a conduit for the ultimate shareholders and came up with a ruling that accepted the request with the proviso that, if the shares were not sold by a certain date, the tax charge – defined as a dividend from the holding company – would crystalize at that date.  A month later, ostensibly because not all the shareholders had signed on the agreement (quite probably due to tax authority bureaucracy), the tax authority cancelled the deal. They might have cancelled the deal for the more convincing reason that they had no right to make it in the first place – conduit companies are extremely specific in Israeli law, and none of those specifics apply to this case – but, they didn’t.

By the time the  ‘Dear John’ letter from the tax authority  had arrived on the shareholders’ doorstep, they had already organized the transfer of shares resulting in a whopping great tax bill on the deemed dividend from the holding company, setting the scene for a whopping great court case.

Another moonlighting accountant

To complicate matters, while all this was happening the shareholders changed horses, or at least accountants, mid-stream. Their new advisor advised them that it looked to him like the shares were in fact held in trust by the holding company, so there should be no tax until sale even without the tax authority’s benevolence. Apparently concurrent with this dazzling epiphany – hey presto – a Swiss lawyer came yodeling over the alps with an undated Fiduciary Agreement (trust agreement), the date of which could only be verified by reference to a fax machine’s header imprint on the last page. When the original accountant was asked if a trust arrangement had ever been mentioned to him, he tactfully answered that he did not recall, but – ‘if it walks like a duck, swims like a duck, and quacks like a duck, it is a duck’. A comedian accountant.

The judge came out firing at the tax authority on all cylinders – they should never have cancelled the agreement just because everyone had not yet signed, while this had all the trappings of a genuine trust arrangement – lock stock and barrel. He reinstated the original agreement (rather than going down the trust route), which was all that was being requested (the price of the shares along with the exchange rate had plummeted by the date the agreement required tax to be paid).

It is not clear whether this is going to be ping-ponged back to the High Court – but, inter alia, it raises an interesting question regarding trusts and holding companies. The trust tax law is extremely restrictive as to what qualifies as a transparent holding company in a trust context – only a Trust Assets Holding Company with its draconian conditions. Non-compliance with the terms of the law (which, in the case of older trusts at least, is a matter of fact rather than design) can lead to punitive tax situation. Could this case, despite the specific wording in the law, help widen the definition of ‘transparent’?

In the version of the play that I saw in London in the 1970s, the window was high, and the policemen had to prove that the anarchist had managed to move a table against the wall, place a chair on top, and climb up and out while they had their backs turned. A bit of a stretch, but you never know…

Keeping VAT off the streets

Now, that is tax evasion

When people refer to ‘tax evasion’, they are rarely talking about VAT. The criminal non-payment of VAT, as distinct from its elder siblings – Income Tax and Corporate Tax, is universally known as VAT Fraud. The name reflects none of the grudging respect for the brilliant wheezes of talented white collar crooks . No, sir. While income tax and corporate tax are carefully molded to reflect the sophisticated progressive and tax neutral economic societies they serve, VAT is the thug in the system. Slapped on in all its simplicity with little room for mercy, VAT attracts evaders of the same ilk. VAT fraud – as the blunt name broadcasts – tends to be crude, and its perpetrators often stupid.

Take the most prevalent VAT fraud in the European Union – Carousel Fraud. Products literally continually circulate between countries – an importer pays no VAT, charges VAT on sale and pockets what he receives without reporting it, there are a number of legal ‘buffer’ sales between various parties in the same country culminating in a sale to one of the importer’s accomplices . He makes a sale back to the original country with zero rate VAT and reclaims the VAT paid. That reclaim is the tax authority’s contribution to the fraudsters’ coffers. Then, abracadabra, the whole process can start again. So, how do they get caught? One possibility is catching the fictitious invoice in the books of the purchaser from the importer – but that is a bit hit and miss. The authorities are more likely to strike lucky thanks to a combination of low IQ and complacency on the part of the criminals. Thus, some years ago a gang was caught carouselling  mobile phones (for some reasons mobile phones are a favorite) because they didn’t bother changing the plugs on the chargers when they passed between France and England and back again. Then there was the bunch who realized they didn’t need so many mobile phones, so they filled the top of every box with legitimate items and padded the rest with bricks. And what about the geniuses whose invoices showed them selling the latest iPhone that hadn’t yet hit the market?

He is going to see ‘A Midsummer Night’s Dream’

Slightly cleverer were the Spanish who, a few years back, decided to make use of the differentiated VAT rates in their country. Theatergoers in one, out of the way, town were given, in exchange for their money, a carrot accompanied by a piece of paper with their seat number on it. The carrot was not liable to VAT, while a theater ticket was. There is no record of how many patrons were refused re-entry after a bathroom break in the intermission because they had eaten their proof of purchase.

Well, according to reports, the Israeli tax authorities are about to try something new – prevention in place of detection. If their plans go through, anybody issuing an invoice for more than 5000 shekels (about US$1500) will have to contact the tax authority to receive authority for the transaction, obtaining a unique number to be included on the invoice. That number will be crucial for the recipient to be able to reclaim the VAT. The result is expected to be a dramatic drop in fictitious invoices.

Unfortunately, the plan is also likely to lead to a dramatic drop in economic activity. The other great example of transactions requiring tax authority approval is that of payments abroad that attract withholding tax. The wait for the simplest of transactions can be painful and economically damaging. Business must be allowed to function efficiently. Putting a bureaucrat in the way smacks of the socialist economy this country started out with and jettisoned long ago.

Much more fun for the VAT inspectors, too

If the loss to the nation’s coffers is really the billions the tax authority claim it to be, it makes much more sense to increase the number of VAT inspectors while working towards a system that allows invoice numbers to be paired by computer between seller and buyer untouched by human tax authority hand.

It can only be hoped that street-sense prevails.

Where are the clowns?

Why does she trust him?…

The safety net provided, in varying degrees, by the social security systems of most developed countries is a source of comfort in a changing, uncertain world. However, the recent shenanigans of Israel’s National Insurance Institute, aided and abetted last week by the Tel Aviv Regional Labour Court, makes me feel that we may all be flying the trapeze with nothing but oblivion below.

The Labour Court has just confirmed that the existence of a  Family Company – a hybrid, the tax of which is normally paid by the main shareholder at individual rates, thus neatly skirting Israel’s two tier classical tax system – condemns the taxpayer to national insurance contributions on its entire annual profit. This, despite the fact that had the individual received the income direct, he would not have been liable to national insurance on such income as capital gains and dividends. Although national insurance contributions by individuals are capped, meaning that many will already be paying the maximum irrespective of the family company’s status, that cap is not guaranteed (it has been removed temporarily in the past when the government was short of cash) and, in any event, it interferes with the clear intention of the tax law of tax neutrality on ongoing activities.

No idea…

That last point is a critical one – although social security has its own law, the way contributions are structured around taxable income means that the National Insurance Institute is Robin to The Tax Authority’s Batman, Blair to Bush, Rubble to Flintstone, and Piglet to Pooh. While minor differences are tolerated, even encouraged, teamwork is paramount.

The history of this particular saga suggests that the National Insurance Institute is having something of a teenage crisis, and its guardian – the Labour Court – has inexplicably tried to soothe it, rather than slap it into line.

It all started over a decade ago when there was a badly worded adjustment to the law that led the Institute to take the above approach. However, following protests, they issued a letter in 2015 reversing their position (ie that individuals would only face contributions on those items of family company income that would be taxable if received directly). However – inexplicably – the change of heart would not be retroactive. So, they could still chase earlier years. This ultimately led to the court case mentioned above – brought by 50 aggrieved plaintiffs. But the best bit was that, a few months back, and before the court decision, the Institute announced that it was reversing the 2015 reversal, and from 2018 would be demanding full contributions. ‘SO, THERE! YAH BOO SUCKS!’

The Institute has announced that it will not be pursuing claims for 2015-2017 (perhaps we should be grateful for small mercies). There is a disconnect here in the decision of the court. As has been cited often in court cases, including this one, the fact that a government body has incorrectly applied the law is not a reason – when the mistake is uncovered – to refrain from going after the little man. Yet, the court appeared to agree to the hiatus of 2014 to 2017.

As Sondheim wrote: ‘Send in the clowns. Don’t bother, they’re here.’

Ladies and Gentlemen! Roll up for the appeal!

Is the law an ass?

‘A fair decision? I’ll be the judge of that!’

Last Sunday, the High Court clipped the wig of a first-class judge – and the tax community in general – in a landmark decision overturning a lower court’s ruling. It reminded me of the reaction I received from a tax authority official to an article I wrote at the turn of the century for a national newspaper. But first, the case in a nutshell:

It involved the sale by an Israeli company of shares in a foreign subsidiary. With the clearly laudable intention of promoting tax neutrality, Israeli law includes a special provision that treats the capital gain on sale – to the extent there are sufficient accumulated profits in the company sold – to the same tax rate as that applying to dividends. Dividends between Israeli companies are normally exempt from tax, on the grounds that tax has already been paid, so that – while the entire transaction is considered one of capital gain– a portion of the gain is then exempt from tax. Tax neutrality comes in, because there is then no need to reduce taxation by physically distributing a dividend, withdrawing funds from the company that may be economically important to it.

The legal discussion revolved around whether such treatment should be extended to the sale of investments in foreign companies – the relief to taxation not coming from the exemption of intercompany dividends (which only apply within Israel), but rather the availability of a credit for foreign taxes paid which, in this situation, produced the same zero effect.

The lower court took a liberal view, concentrating on the ‘legislature’s intent’, and effectively recognizing that the wording of the law left something to be desired – in layman’s terms, ‘filling in the gaps’.  Foreign companies would be included. The higher court was far more prissy. The legislature clearly knew exactly what it was doing, the wording was clear, and the intention of the law was only to achieve tax neutrality in domestic transactions – who gives a fig about international ones?

I always thought it was Berk’s Law

Quite apart from the hypocrisy of a court that has built up a reputation for waving its gavel at any output of the legislature it doesn’t like the look of, the assumption that the legislature gets tax legislation right simply beggars belief.

Which brings me to that article I mentioned.

There was a piece of new legislation in the early 2000s (ironically, if my memory serves me correctly, it involved investment in foreign shares) that included three sub-paragraphs. Without the absent fourth (it was a question of working backwards) the legislation was without teeth. In my slightly cynical way, I suggested the scene at the meeting of members of the  Knesset Finance Committee as they worked into the night to complete the legislation. A senior tax official, drafted in to assist, looked at their watch and gasped. It was 11pm and they had to relieve the babysitter. The meeting came to a quick end, and paragraph 4 was never legislated.

Of course, the entire piece was pure fantasy. The article was duly published in the Business Section of the newspaper’s weekend edition.  As the new week began, I received a phone call from a senior tax official: ‘How did you know?’

You couldn’t make it up.

Perhaps because of its complexity, tax legislation is often notoriously incomplete. Thankfully, the tax authority often issues professional circulars, as well as rulings, that attempt to fill in the gaps. Indeed, in the very field of foreign tax credits, I don’t know where we would be without them on such topics as Trusts and Foreign Personal Vocation Companies.

The High Court should be a last resort for sanity. I rest my case.

The Windsor Saga

Who by car crash? Who by suicide? Who by execution?

One of the perennial challenges of the writers of successful soap operas is finding original ways to write actors, who have had enough, out of the script. They can’t all be sent off to Canada, and the public sometimes doesn’t like what it gets. When, broadcast on Christmas Day 2012,  Downton Abbey’s Matthew Crawley died in a car crash on the way back from visiting his wife and new-born son, the outrage was almost tangible. One nutter even tweeted: ‘Why oh why Lord are you testing me…let alone on the day your son was born?’.

‘It’s the BBC, they want us to do a series.’

The British Royal Family has, of course, been a real-life soap opera at least since the Queen let the cameras into Buckingham Palace a half century ago. Writing people out of the script is a lot more complicated than Downton Abbey. Tragically, they have had the car crash and the sex scandal(s), while one of their number (plus household) is about to head for Canada. Lacking the imagination of Downton creator Julian Fellowes, others just get sidelined or – like old underground trains – are retired from public service.

The latest ‘Rexit’, that of Prince Harry and his family, appears to be attracting attention, less because of the human element, and more because of the budget. That isn’t what writers want to see – it detracts from the fairy tale script, and places the whole event in the grubbiness of the real world.

The British press is full of that bombastic and pompously self-righteous term: ‘The British Taxpayer’. How are they going to live? How much is it going to cost ‘us’? While that last question may be appropriate for Leninists, Trotskyites, and Corbynistas, it is not the ticket for a country whose electorate just returned a Conservative government with an 80 seat majority.

He also surrendered America

The Queen is not a pauper surviving on handouts from the State. Monarchs across the centuries amassed huge fortunes from – inter alia – rape, pillage and murder that gave them direct or indirect control over the means of production and human capital. Nice people all. On assuming the throne in 1760, George III surrendered his income from the ‘Crown Estate’ (basically, his property) in favor of an annual payment from Parliament (the Civil List). The Crown Estate was effectively placed into trust for the State, and the Treasury received the income. That state of affairs lasted for over 250 years until, 7 years ago, the Civil List was replaced by the Sovereign Grant which set the payment to the monarch at 15% of the total net revenues of the Crown Estate (temporarily increased to 25%).  Add to this the Royal Family’s  private wealth from the Duchies of Lancaster and Cornwall, as well as the occasional  flutter on the horses, and the Queen is not short of a pound or two.

Thus, as the right to own private assets is still embodied in British law, and as the Sovereign Grant – as successor to the Civil List – is a contractual agreement to pay royalties at a fixed percentage  in perpetuity for the surrender of all control of the Crown Estate by George III, why is it anybody’s business how the wealthy Queen finances her grandson’s welfare? Were the monarchy to be dissolved today in anything other than a communist-style revolution, the royals would be entitled to the two duchies (as at present) and a financial settlement in respect of their rights to income from the Crown Estate. They wouldn’t be living on a council estate as depicted by Adrian Mole creator Sue Townsend in ‘The Queen and I’.

The British Taxpayer can’t even feel indignant over the income tax and capital gains tax position of the monarch anymore. While a king or queen cannot pay tax (it is, after all, HER MAJESTY’s Revenue and Customs), the Queen and Prince Charles have been paying voluntary amounts since 1993 that are supposedly designed to shadow the position of the rest of us.

There is one gaping exception. One of the subplots in Downton Abbey is the recurring issue of Death Duties, today known as Inheritance Tax. It serves as the reason great family after great family is forced to sell their stately home or significant parts of their estate. Under the Queen’s arrangement with her Revenue and Customs, everything she leaves to her successor is not liable to Inheritance Tax (as well as everything inherited from her mum). While it might be argued that the properties included in the Crown Estate (such as Buckingham Palace and Windsor Castle) do not belong to her, Sandringham and Balmoral definitely do (her father even had to buy Balmoral off his abdicating brother), not to mention the assets held by the Duchies.

A parody of a soap opera

So, if the press wants to get on its soap box, lay off the Sussexes – that’s a family affair – and concentrate on the death taxes. Of course, were the position to change tomorrow, Her Majesty could transfer all her assets to Charles immediately, and would only have to live 7 years to avoid Inheritance Tax. At 100, she would be a year younger than her mother when she died. Long live the Queen!

Now is the winter of our discontent

How did they find me?

Years ago, before Millennials stalked the earth, I received a call from the Israeli tax authorities. ‘When is your client going to approach us regarding the capital gains tax on their transaction?’ I was duly impressed by the fact the inspector had read that morning’s paper and put two and two together, and was tempted to reply, ‘When they approach me’, but I opted for the benign, ‘All in good time’.

Once more unto the breach, my friends, once more

The fact was that, in the good old days, when the tax authorities wanted money, they had to get off their bottoms and sniff it out. I believe the thrill was in the chase. Not anymore.

Our friends at the Treasury now bless us with their annual shopping list of ‘Positions Requiring Reporting’. These are common tax planning devices where the taxpayer is told, ‘Do what you want, but you have to tell us about it if you are going to make a packet from it’. If all things go to plan, the sniffer dogs will be round before you can say, ‘Two tickets to South America, please’.

Thou hast slept well. Awake

The tax inspector is not as benign as he looks

The latest list, published last week, leans heavily on those coming out of the 10 year tax exempt hibernation granted to first time residents and veteran returning residents on their foreign income. As that particular jolly only entered the law in 2007, it is not surprising that the boys and girls gathering fuel for the engines of state have only woken up now –a year after the  first beneficiaries of the status  were required to report (the 2017 tax year, reporting in 2018).

What is irksome is that, apart from some of the positions being churlish (the income of CFCs and Foreign Personal Vocation Companies being taxable for the entire year even if the new resident’s 10 year period only expired on December 30th), there is at least one which is downright weird. The best way to understand it is to assume the authors of the list were having such a festive time in December while sitting in the comfort of their offices, pens at the ready, that they let the party get out of hand. I will explain.

Among the new positions, it is clarified that, if a dividend is paid from a foreign company after the end of the 10 year exemption period, but in that same year, despite the fact that the income of the foreign company accrued during the 10 year period, it is taxed normally. Fair dinkum. Dividends are a distinct ‘source of income’ in the tax ordinance, and the dividend appeared after the 10 year period. Although not presented in order, it is likely this led them on to the CFCs and Foreign Personal Vocation Companies where a ‘notional’ dividend is considered received on the last day of the year. Not nice that they didn’t split the year into ‘before’ and ‘after’ – it wouldn’t have hurt if, heaven forbid, they had taken the intention of the legislature into account – but there is little to do but gnash teeth.

Aye, there’s the rub

Then the authorities went a step further. Trusts settled by living parents (and certain others) for their Israeli resident children – known as Relatives Trusts – are, by default, required to pay  tax when a distribution is made. Provision is made in the law, and tax authority circulars, for the capital element to be deducted and losses and foreign tax credits to be taken into account, subject to proof being provided to the assessing officer. This approach is distinct from regular trusts that pay tax on an accumulative annual basis – a status that can also be elected by a relatives trust that chooses not to pursue the distribution route (also obtaining a beneficial tax rate). Beneficiaries in their 10 year exemption period are unequivocably entitled to an exemption from tax. But, what about those on the distribution route who receive distributions of income earned after the exemption period?

Fair is foul, and foul is fair

The authorities got carried away with their logic

Evidently pushing the dividend analogy one stage too far, they came to the conclusion that, as the tax event only occurs on distribution, no exemption will apply if the distribution is made after the 10 years. However, while dividends are a ‘source of income’ liable to be taxed in their own right, a distribution is not . What is more, the wording of the law clearly relates to the income derived or accrued abroad – not a million miles from the wording of the clause dealing with the 10 year exemption. It is hard to understand why the exemption would not apply.

I am not bound to please thee with my answers

The good news is that these positions are not legally binding – although their reporting will invite the prospect of audit.

But, let’s face it – the language of our laws isn’t up to Shakespeare’s standards.

Auld Lang Syne

Some cops will do anything not to be kissed on
New Year’s Eve

On New Year’s Eve, a man’s thoughts turn to the year that has just flown by. On the eve of a new decade, a man’s thoughts turn to the decades of his life that are lost. What has happened  since I sat glued to my grandparents’ gogglebox at five to midnight on Hogmanay in 1969? I wonder if that drunk lying on the roof of my car pretending his arms were a pair of windscreen wipers, as I inched away from Trafalgar Square in the first hours of 1980, is still alive? (Come to think of it, I never looked back to see if he was still alive when he fell off.)

Israel got back to agriculture in the end

Nostalgia was not quite the word that came to mind when I noticed the other day that the Israeli Income Tax Authority had once more extended Annex 1 to Instruction 34/93, while renewing a sweetener as a sop to the modern world.

When, early in my international tax career in this country, 34/93 hit the scene, it was something of an eye-opener. The instruction dealt with the requirements for deducting tax at source on payments abroad and, for the first time, included the country’s banks as gatekeepers. The upshot was that, with some specific exceptions, if you wanted to get money out of the country without resorting to a suitcase, it needed a request to the tax authority and, regularly, a long wait. 1993 was before the dotcoms and real estate tycoons lit up Israel’s economy internationally, so the parochial 34/93 was a bearable nuisance. There were two ‘get out of jail free’ cards – the special company (annex 1) which allowed largish companies to handle their own foreign withholding tax, and Certified Public Accountants, who could authorize many types of payment. The trouble was – and the reason special company status was used sparingly, and any sane Certified Public Accountant said ‘thanks, but no thanks’ – was that the responsibility for getting the withholding tax right rested on the payor – if the foreigner in some greasy foreign land did the unthinkable of lying, the noose was round the Israeli’s neck.

Fast forward a quarter of a century and 34/93 is still there. A small, but convincing, international economic superpower has to grapple with a system devised by those who dodged the comet that wiped out the dinosaurs. To add insult to injury, the authorities can’t even hide behind the bureaucratic safe harbor of ‘we are just renewing it’, since this year they reconfirmed an earlier change (I suppose we should be impressed that they managed to find a copy of the original instruction – it isn’t on the tax authority’s website). Whereas payments to a foreign resident for services provided abroad (the absolute ‘what the hell do I have to ask permission for this?’ payment) used to be permitted up to $60,000 without the need for approval, the sum was raised to $250,000 a few years back. ‘Not bad, what is he complaining about?’ I hear you mutter. What many companies and banks miss is that the sum is the total of all payments a specific company can make in the year for services abroad. From personal experience, that is about as daft as the original $60,000.

The sane approach, that many of us have been advocating for years, is for the recipient to be required to fill in a form with their details and their claim for treaty benefits etc. The onus would be on them to tell the truth. In the modern world, if they were found to have made a fraudulent statement, the authorities could claim the additional tax and penalties through future payments, or make contact with the tax authority in the recipient’s country of residence.

Where 34/93 belonged

Of course it is not all bad news in the Start Up Nation. Around two years after the Instruction was issued, I was asked to lecture a group of bank clerks on the rules. Around five minutes into my talk, there were fireworks. ‘If we do that, the customers will just trundle off to the bank down the road.’ End of lecture. I spent the rest of the half hour listening to what they actually did. Fascinating.

Happy New Year (God preserve us).

Miracle in the Holy Land

Choose one

Chanukah and Christmas – which coincide this year – are both, in their distinct ways, about miracles that took place within theoretical walking distance of where I am now sitting. Another miracle that took place last week would have needed the car – the Lod District Court ruled against the Israel Tax Authority (ITA) in, what should become, a landmark case.

That doesn’t happen often. The tax authorities are normally clever enough to strong-arm a compromise on issues where they are not steady on their feet, so that a large proportion of the cases that come to court are no-brainers to the detriment of the little man (who was just wasting his money and everybody’s time).

What was doubly miraculous about this case was that it involved a real multinational group (not like the open and shut case a few years ago involving a holding company in Holland that produced directors’ meetings minutes in Hebrew). From experience, multinationals don’t run to court. A combination of maintaining good relations with the government and its offshoots who provide handsome incentives for investment in Israel, the small amounts of money involved looked at globally, and the geographical complications of pursuing a case from thousands of miles away, encourage the good old compromise – paying to make the ‘problem’ go away.

Not this time. The case involved an international business restructuring ie moving activities around within an international group. The group is involved (successfully) in something incomprehensible (to me) to do with Broadband technology. The previously independent Israeli subsidiary licensed its intellectual property to a foreign group company (not strictly corporate restructuring, but the tax authorities thought it was), signed a cost-plus agreement with another group company for marketing services, and signed another cost-plus agreement with its parent company for R&D services. The business had changed.

These are the rules. Don’t argue.

The tax authorities waded in with their hot-off-the-press professional circular from 2018 on Multinational Enterprise Business Restructuring, the 34 pages of which most of the time boil down to a  simple message: if an Israeli company is part of an MNE (multinational enterprise) which enters into  business restructuring, changing the Israeli company’s business model, expect a capital gains tax bill for transferring part of the business abroad.  The ostensible basis for their position was the OECD’s mammoth ongoing Base Erosion and Profit Shifting project, and specifically its ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017’, together with a recent Israeli court case.

If there is one word that comes to mind in all OECD professional announcements it is ‘nuance’. There is seldom an absolute conclusion that applies in all cases. The ITA appeared to miss that point. Fortunately, the judge seems to have had a better grasp of what the OECD was not saying, as well as an infinitely better grasp of the recent court case the ITA was referring to – after all, he was the judge on that case, too.

The MNE won the case and the ITA was ordered to pay costs.

Although the case has been clearly decided correctly, it is worrying. If it deserved to come to court at all, the arguments should have been different – more ‘nuanced’. Instead, it was left for the judge to give a lesson in OECD guidelines and pure logic, which is not his job.

Did someone say ‘Bar’? ‘Miracle’?

It can only be hoped that this will prove a sobering experience for the professionals at the ITA, which will  serve to raise the bar in transfer pricing disputes going forward.

Miracles do happen (sometimes).

Happy Chanukah and Merry Christmas

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.

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