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.
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.
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.
Given the plot of the recently released movie ‘Yesterday’, it is ironic that I can’t get the Beatles out of my mind. A ruling published by the Israeli tax authority around the time the latest blockbuster hit the screens sent me on my own magical mystery tour.
What, I hear you ask, could tax have to do with ‘magic’ or ‘mystery’, or anything anybody ever associates with ‘interesting’? Hold onto your seats.
The ruling was basic to the point of bland – in other words, the sort of thing you knew all along, you wondered why it was published, and you self-flagellated for wasting the time reading it twice to try and find the catch.
An Israeli resident individual set up a foreign company in 2000 which held all of the shares of an Israeli company. He now requested a tax-free transfer of the Israeli company from under the foreign company to a new Israeli company fully owned by him. There is a provision in the law that allows such transfer, subject to a request to the tax commissioner and a myriad conditions to ensure the Israeli tax authority is not deprived of tax. Big deal (Google translate: no big deal).
Then, all of a sudden, it hit me between the ears. The big deal was in what was not written. There was no mention of the tax saving on the ‘circular’ dividend. Until the reorganization, dividends paid by the Israeli company to the foreign company would have been liable to withholding tax. Leaving aside any foreign tax, when the foreign company distributed dividends to the Israeli resident individual – according to statute law – he would have been liable to tax on receipt of the dividend without credit for the tax previously withheld to the foreign company. The reorganization meant that, going forward, he would receive dividends direct from the new Israeli company, tax being paid once on the dividend (no tax would apply on the dividend between the old Israeli company and the new one according to Israeli law).
The fact that the tax authority did not even mention it as a back-patting gesture signaled that – in keeping with a long tradition, and despite the deficiencies of the law – they appear to take it for granted that a ‘circular’ dividend should not be liable to double tax, giving a credit to the individual receiving a dividend from the foreign company for the tax withheld originally by the Israeli company.
The history of this is quite remarkable.
Since the beginning of time – 1 YTO (Year of our Tax Ordinance), corresponding to 1961 CE – there has been a clause (s163) that solved the problem of double taxation on ‘circular’ dividends in the manner described above. The only problem is that it deals with a tax that, since 32YTO, no longer exists. For reasons possibly best known to somebody, it was never knocked out of the Ordinance. Indeed, at the time of the Great Reforming Flood in 43 YTO (2003 CE), when so much was destroyed and replaced, I discussed the matter with a senior tax official who couldn’t explain its survival.
Meanwhile, in 42YTO (2002CE), when the rising water of the reform was already at the door and Israelis investing abroad were praying for salvation, the tax authority surprisingly issued a non-legally binding circular dealing with foreign tax credits under the soon to be drowned system (they even stated clearly that another circular would be issued dealing with the postdiluvian situation). That circular included a reference to s163 implying, in circular fashion, that credit on a circular dividend could be claimed. There was no reference to the fact that s163 clearly no longer applied. Somebody was sleeping in the biblical Land of Nod. Interestingly, when the new circular was finally issued in 44 YTO, there was no mention of s163. We were back on dry land.
As the years passed, the tax authority was known to give private rulings solving the double dividend tax on the basis that it just wasn’t fair in a two-tier system (corporate tax plus tax on dividend) to hit people with a triple-tax. But, as advisors we were always reticent – one never knew when the spring would go in a tax official’s head.
Then, in 54 YTO (corresponding to 2014 CE) a case concerning a sister provision in s163 came before the courts in the form of an appeal against the tax authority’s decision. The judge threw the appellant out on his ear – and that was what was widely reported at the time. But, there was incredibly important ‘obiter’ in the case. Part of the appellant’s argument had been that the tax authority should be consistent in allowing a credit according to the semi-relevant circular mentioned above from before the Flood. His honour made a few things clear. Firstly, despite the language of the law clearly not applying any longer, the intention of the original law was to avoid triple-tax in a two-tier tax system. Hence, interpreting the current law widely in that vein, was appropriate. Furthermore, even if the authorities were working ‘beyond the letter of the law’ in their circular it would only apply where there was triple tax – which was not the case before the court.
So, where does that leave the matter? The tax authorities appear consistent in their approach, and there is obiter in a District Court case. But, that does not mean that the situation is closed hermetically. There could always be an official who wakes up one morning and conveniently forgets ‘Yesterday’. So, it appears that anybody contemplating circular dividends still needs to work it out with a little help from their friend the professional tax advisor. The advisor, hopefully, won’t let them down.
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).
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.
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.
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:
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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’
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.
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).
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.
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.
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!
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.
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.
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.
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.
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?