Tax Break

John Fisher, international tax consultant

Archive for the tag “Israel tax”

Keep Calm and Carry On

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About as intellectual as it got

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

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

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

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

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What an interesting job

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

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

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

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

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I wonder if Mel is one of George’s

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

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

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

It could have been 1984

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1960s subliminal brainwashing led a generation to careers in numbers

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

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

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

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Not that seasonal

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

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

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One way to remember January 30th

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

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

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

Telling it like it isn’t

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Very last call …

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

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

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Game over

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

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

What went wrong?

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

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

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The only thing crooked about him

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

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There are always the traditional methods

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

The last weak joke of the 20th Knesset…

Wakey-wakey!

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Two minutes to midnight

It is the morning of the Maths exam that will decide which, if any, university awaits the candidate. He/she suddenly realizes that he/she hasn’t even started learning the syllabus.

How many of us have periodically woken in a cold sweat from that nightmare in the course of our adult lives?

I sometimes feel that, especially around the December full moon, tax advisers do their darnedest to  induce such feelings in the populace with ‘Achtung!’ articles of what must be done  (but clearly can’t be achieved)  before drawbridges go up for the Christmas/New Year break.

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Don’t panic!

I only ever tried to panic a prospective client once. (I warned a foreign company that  they needed to get their VAT house in order to avoid risk of  criminal prosecution, they ignored me and went to an alternative firm that proffered soothing advice, and they were criminally prosecuted two years later).

So, allow me to preface my remarks on Israel’s  10 year tax exemption period for first-time and certain returning residents by stressing that they are not aimed at those whose benefits end in the next few weeks, but rather in 2019 and thereafter. People who arrived on their equivalent of the  Mayflower  in 2008 (or earlier) are either sorted out, or the best of luck.

Everybody – that is the entire Jewish world, the OECD and the IMF – by now knows that Israel has operated a territorial tax system for first-time and certain returning residents since 2008 (with retroactive force to 2007). The law states that a first-time resident or veteran returning resident is exempt for ten years from income produced or derived outside Israel or whose source is in assets outside of Israel, as well as capital gains from the sale of such assets. The problem is that (from my experience) many mistakenly believe that, as long as they don’t go to work on a kibbutz milking cows, they can forget about tax for ten years. In reality, even those who do not incur any Israeli taxation during the exemption period need to be prepared for the day at the end of the decade when they fall off the tax cliff.

OLIM-HADASHIM

New olim, yes. New residents, perhaps

First of all the good news. Despite the drafting of the law being as hopeless as much other tax legislation in the country, more than ten years down the road the  tax authorities seem to have made their peace with much of the excruciatingly inconsistent language, as well as the fundamentals of residence. Grammatical glitches appear to have been passed over unnoticed, and nobody seems to be bothered about the repeated careless use of the word ‘Oleh’ in pronouncements, aliyah not being a prerequisite for tax residence. 2018 saw the first annual filings of residents coming out of the ten years (for the 2017 tax year), and most of the reporting snafus will presumably be ironed out over the coming months. Similarly, some of the more heroic assumptions required as the assessee slowly glides out of the exemption period (there are special provisions for capital gains) can be expected to be blessed, or otherwise, by the authorities.

As people start to report, the authorities could take an interest in the exemption period, looking for amounts that should have been reported despite the exemption.

In any event, among the issues assessees need to be considering as the watershed approaches are:

  1. When did they actually become resident? Although, in terms of the wording of the law, residence under domestic law as opposed to treaty is an annual thing, the authorities have repeatedly made clear in writing that they interpret it as something that can change mid-year. So far, so good. The problem is that their pronouncements on when the ten years actually starts have made clear it is not necessarily the night they give you a funny hat and a flag at Ben Gurion airport if, for example, there was already a home in Israel and/or significant time has been spent in Israel.
  2. Are they sure none of their income was ‘produced or derived’ in Israel, and thus liable to tax? There have been rulings over the last decade concerning new residents working  with foreign companies from Israel ‘by remote control’ through internet, e-mail etc, or trading foreign securities from Israel. The tax authorities are operating an amnesty procedure until the end of next year – although if an anonymous request is desired, it has to be made by the end of this month (ouch!).
  3. Corporate structures abroad, while being convenient as long as Israeli taxation does not apply, may need reorganizing. That is something that generally needs to be done while the exemption is still in place.
  4. Decisions need to be made regarding whether to realize assets – significantly  parts of securities portfolios  – before the end of the exemption period, or to benefit from the only gradual linear increase in capital gains in the post-exemption period.
  5. Thanks to developing legislation since 2006, trusts are supposed to be largely tax neutral – but there are still some horrible jagged edges that can create nasty tax accidents . There are certain benefits to new-resident settlors or beneficiaries that soothe the pain as long as the exemption period lasts. The long-term future of such trusts needs to be considered.
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Public Service Announcement

I sincerely hope this hasn’t scared anybody. I prefer to think of it as a Public Service Announcement. Really.

Before our very eyes!

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The Ten Commandments weren’t supposed to be easy

When it comes to aphorisms, ‘Oldie but Goodie’ is high on my list of suspect examples. Generally quoted by the generation above mine to fill the void of laughter following a particularly hackneyed joke,  it only  rolls happily off the tongue when served with lashings of irony.

Such was my reaction to a ruling published by the Israeli tax authorities the other day. It stumbled through a long preamble, only to mention, before things really warmed up, that it was essentially in line with another ruling from Christmas week in 2016. It begged the question: ‘ Why waste busy peoples’ time knocking out another one?’ Was it because it was so enjoyable the last time, we had to be fed it again?

Not quite.

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‘Well they would, wouldn’t they?’

The new ruling, though causing no surprise to the cynics that make up the numbers in our profession, is well beyond a joke. The Man on the Clapham Omnibus would surely ask: ‘How could they?’

Well, they can, and they did, and it was obvious they would.

The ruling related to an individual who had left Israel for the US, breaking residency, and  subsequently returned home. As part of his US salary package, he received options with various vesting periods. The tax authorities had to decide what part of the financial benefit from exercising the options should be taxed in Israel.

Thus far, we were in 2016 country. That ruling, based on court precedent, established that the profit earned abroad from options exercised while the individual was still abroad would not attract any tax in Israel, as it was not sourced in Israel. So far, so good. Given that information, and asked an inane quiz question: ‘What  taxation would apply to the profit earned abroad during the vesting period if the options were simply exercised in Israel on the individual’s return to Israel?’, our Clapham Omnibus gent would reasonably have come up with: ‘Zero’. At that point, the trapdoor under his upper deck seat would have opened and sent him crashing into the arms of the conductor collecting fares below.

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‘You’ve got to pick a pocket or two’

The decision given, in 2016 and once again in 2018, was that – although Israel operates a standard modified personal tax basis (Israeli residents are taxed on their internationally sourced income, and foreign residents on their Israeli sourced income), as salaried employees are charged to tax in Israel on a cash basis, the entire amount should be charged to tax in Israel, even though it was not sourced in Israel.

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A rare oldie but goodie

The 2016 decision, with its literal accuracy but flawed concept (cash basis is a timing concept, not a country source concept), stopped there. Clambering to his feet, the bus inquisitee – still hoping for the holiday for two in Benidorm – would have accepted the challenge of the next question: ‘If the individual once more leaves Israel, and he subsequently exercises options abroad, part of the vesting period of which was while he was Israeli resident, what would be his tax in Israel?’ Easy! Already seeing in his mind’s eye his six-pack lying on the beach next to his bright yellow lilo, he would answer: ‘Zero! He is on a cash basis!’ At which point the floor would open up and – if he managed to avoid the rear axle of the bus – he would be left, not believing his bad luck, in the middle of the road, holiday dreams in tatters. All thanks to the November 2018 decision that – correctly – states that the income sourced in Israel is taxable in Israel with no reference to where it was received. The problem is that it also restates the 2016 ruling’s cash-basis conclusion, making it inconsistent and illogical.

The 2016 ruling brought a sardonic smile to my face. The 2018 ruling is laughable.

I think I’ll try this one on my kids.

The taxman takes his cut

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At least he also had a day job

Initially dubbed ‘the war to end all wars’, the act of carnage that ended a hundred years ago this week had to later suffer the ignominy of having ‘First’ stuck at the front of its name. While recognizing the sacrifice of the combatants and the tragedy of 20 million dead, subsequent generations have suggested the futility of the whole thing.

As the world prepared to commemorate those events, Israel’s judges, perhaps ironically, had to waste their valuable time on something else absolutely futile – the taxation of professional poker players (not one, but two). The wording of the judgements (and appeals) gave the distinct impression that each learned judge would have been quite happy for the young men in question to take their chances being ‘sent over the top’, but they had no choice other than to give them a fair hearing.

Although I have no sympathy for gamblers, and in both cases the end result was the payment of tax at marginal rates (one of them had to be reined in by the court as an Israeli tax resident), the result bothered me.

Israel, like other tax jurisdictions, operates a system of marrying income to various sources (such as business or vocation, work, interest). The word ‘income’ is defined in dictionaries as deriving from capital or labour – fitting nicely with the sources mentioned in the Income Tax Ordinance (which is just as well, really,  since it is called the ‘Income’ Tax Ordinance). The proceeds from gambling and lotteries  do not derive from labour or capital, and did not therefore have a place at the sources table in the law.  In the course of time, however, legislators were reminded of HL Mencken’s definition of Puritanism: ‘The haunting fear that someone, somewhere, may be happy.” As a result they shoe-horned an extra clause taxing  profits from gambling, lotteries and prizes. To make the whole thing work they called  the resultant windfall ‘income’, a sleight of hand that would not disgrace the most unsavoury of card sharks.

However, when the tax authorities brought the two intrepid poker players to the table, they did not play for the 25%  tax that the misplaced clause then legislated, but full marginal tax on the basis of ‘business’ income. Both these characters were, after all, professional players. The position of the courts was that – similar to business income – their income could be considered income from a  vocation, their expertise implying effort and, therefore, labour. The last hand played was the appeal against the tax authorities’ insistence not to allow expenses in the production of income such as flights, hotels and payments to the casinos that financed some of the tournament games (the mind boggles). Here, the judge was consistent – if it’s income from a vocation, it’s a vocation, and proven expenses should be allowed.

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And so did they…

The bug in all this is that while these poker players were taken out of the bunker of  restricted tax  onto the battlefield of regular income, there is still dissonance.

The various sources of income (labour and capital) that combine to form the backbone of the Income Tax Ordinance are inextricably linked to Gross National Product and Gross Domestic Product. It isn’t by chance that governments measure their tax take accordingly – by taxing income, they are  taking their share of the value created in the economy.

Gamblers – professional or otherwise – do not add to the value of the economy. It is a zero-sum game. One person’s  gain is another’s loss. When, the legislature incorrectly added a section on gambling to the Income Tax Ordinance instead of legislating an excise tax (as they should have done),  they at least had the sense to exclude the possibility of setting off losses from other sources of income while isolating the gambler’s activity.

In transferring professional gamblers to a business/vocation basis, while the rate of tax may be higher, in a perfect world the overall tax take should be zero  (or negative due to expense set-off). Of course, in practice, most of these games are taking place abroad against non-Israeli taxpayers which clearly changes the domestic picture – but today  the name of the game in international tax  is a level playing field.

It feels like somebody wasn’t playing with a full deck.

Nowhere to hide

Israel's Finest

Israel’s Finest

Tax Break has just had its longest break since its inception in 2011 due to the difficult period Israel has been going through. The post below is more sober than usual (in fact, for some people, it might be downright depressing). Please do not adjust your computers – normal service will be resumed as soon as possible.

Shortly before Israel, in order to protect its population from the indiscriminate firing of missiles from Gaza, was left with no alternative but to enter into a bitter war with Hamas, the Israeli Tax Authority embarked on its own “seek and destroy” mission.

The targets were Israeli residents who “omitted” the reporting  of income to the ITA.

The Income Tax Commissioner has stated on several occasions since taking office last year, that he favours a policy requiring all residents to file an annual return – as opposed to the current situation where most employed individuals are covered by withholding tax on their salaries and transactions  through Israeli financial institutions.

Even 007 wouldn't refuse Odd Job cash

Even 007 wouldn’t refuse Odd Job cash

Apart from the scourge of incorrigible Odd-job men who have, “Pay me in cash and I will knock off the VAT,” woven into their DNA – as well as monthly property rentals paid for in grubby two hundred shekel notes – the real problem in 21st century Israel is income from abroad.

Until 1998, when the foreign exchange market was opened up and Israelis could freely invest overseas, the system worked quite well. If you had income-bearing assets overseas, you were, by definition, a naughty person (euphemism for a  crook). Even our most lamented, assassinated Prime Minister was caught red-handed holding an American account from the time he served as Ambassador in Washington (to be more precise, it was his less lamented wife).

Nowadays, apart from occasional new immigrants with all sorts of exemptions, anybody holding income-bearing assets abroad is required to come forward and voluntarily file a tax return (sometimes just a ‘short-form report’).

Aye, and there’s the rub.

It is evidently a lot easier to break the law by “omission” than “commission” and the Income Tax Commissioner believes there are unbelievable sums of undeclared income offshore.  He reasonably concludes that, if individuals had to file  a return that included a declaration that any false statement could result in the cutting off of their hands and feet, most would come clean.

So far, so good.

The Authorities have, however, admitted that, with current staffing levels, a nationwide filing requirement is not on the cards. As a result, they came up with the rather clever idea of sending a letter to 120,000 individuals who do not currently file a return, but who make regular trips abroad, own more than one property or just look plain suspicious.  The polite letter is accompanied by  a form to be honestly completed and signed (on pain of death).

This all sounds eminently sensible, but allow me to apparently digress for a moment.

The authors of the cult book ‘Freakonomics’,  who have been milking the franchise for all it is worth, recently came out with their latest, very underwhelming, ‘Think like a Freak’.  I found only one notable idea in this tome,  but it is a real eye-opener. Have you ever thought (like every week) when you receive a spam email from Nigeria in search of your bank account, why the scammers don’t move on from Nigeria to, say, Zambia? Surely, the logic goes, everybody knows that Nigeria is synonymous with fraud? It turns out that the scammers are not as stupid as they seem as they bob  about on their hundred foot yachts in the Caribbean.

The Nigerian scammers work to minimize ‘False Positives’. The e-mail you receive in your spam-box has been sent simultaneously to millions at  virtually no cost in time and effort. If only one per cent got back to them with queries or a possible desire to invest, they would need armies of potentially whistle-blowing staff to handle the correspondence. The only people who will respond to these e-mails today, apart from Interpol and the odd Nigerian,  are real fools who have been out to lunch for the last 10 years. They are, almost by definition, totally gullible.  The Nigerian bit weeds out the ‘False Positives’.

Now, given that the tax authorities admit that they are short of manpower,  the form accompanying their ingenious plan should have been simple.  It should have asked a series of Yes/No questions followed by threat of  extermination and excommunication. The 120,000 forms could have been run through a computer in an afternoon and the few thousand guilty would have received notice that their lives are henceforth ruined by the following morning.

Why didn't somebody think this out?

Why didn’t somebody think this out?

But this is Israel. Instead of delaying the process by half a day, they decided to send out the standard document for the voluntary opening of a tax file. Let alone the individuals, it wasn’t clear to us tax advisors what needed to be filled in. Furthermore, the form  asked for a considerable amount of information that will mean each one needs to be waded through manually. According to some commentators, it will take months to get through the pile.

Thankfully, the army went about its business more systematically. God bless the State of Israel and its excellent defence forces.

 

 

To tax or not to tax…..

It all makes sense to him

Forced to summarize Israel’s international tax legislation in half a sentence, I could not better Shakespeare’s all time bogeyman – Richard III:  

“Deformed, unfinished, sent before my time/ Into this breathing world, scarce half made up”.

Tax legislation in the first half-century following Israel’s independence adopted, what might now be termed, the “Mitt Romney Approach” –  inconsistent but pragmatic. At a time when citizens were largely barred from investing abroad, work income and capital gains were charged to tax on a worldwide basis while income such as dividends, interest and royalties from abroad were, in practice, exempt.

Then, following liberalization of exchange controls and serious personal and corporate investment abroad in the late 1990s, legislation passed the Knesset in mid-2002  moving Israel to a pure worldwide basis of taxation with effect from January 2003.  This almost pedestrian approach to enforcing the new law – allowing around six months to get organized –  was, and is, in contrast to the normally frenetic approach  adopted by the Knesset, Israel’s parliament, which regularly enforces  legislation almost overnight (and, sometimes, the previous night or earlier).

This may explain the remarkably naive stance adopted by certain respected tax advisors at the time, who insisted, to the horror of the more worldly among us, to advertise their prowess at every opportunity in the national  press, explaining the broad (but, rarely, precise) methods to legally circumvent the new regime.

While the income tax authorities could (and can)  be accused of many things, illiteracy is not one of them and, lo and behold, they managed to fit the art of newspaper reading  into their busy schedules. It was therefore little surprise to the mature and experienced when, prior to enforcement of the new law, an amendment to the amendment was passed in the Knesset to close the loopholes that had been so altruistically revealed by our fellow professionals.

But, as Hamlet (topically since Israel has just ratified a new double taxation treaty with Denmark) said – “Aye, there’s the rub”. 

The authorities were in such a rush to get the legislation passed ahead of the January 1 deadline that the adjustment left much to be desired ( for them, if not for the rest of us). To add to the misery that awaited them, they had insisted in going it alone with the legislation. They had neither canvassed extensive public comment nor, apparently, recognized that, not being the first, second or fiftieth nation on earth to adopt a worldwide basis of taxation, it might be wise to benefit from the learning curves of others rather than starting from scratch.

The result was : a flawed system of credit for foreign taxes paid; ambiguous controlled foreign corporation rules, the latest explanatory notes in respect of which came out only a month ago – nine years after the legislation came into effect; a participation exemption regime that  literally exempted almost everyone from participation and, from day one, was treated as if it had leprosy; and a tax-transparent company system that has transparently gone nowhere. We were subsequently introduced to Trust-Nobody Trust rules in 2006 and, two years later, the Worldwide Untax Regime for new immigrants and returning residents.

While this blog will endeavor to maintain a truly international flavor, I make no apology for including from time-to-time in the weeks and months ahead, reflections on the system with which I have an “up close and personal” relationship. At the end of the day there is much more that unites countries in their international taxation rules than divides them and I hope those reflections are of interest to everyone.

Amnesty International

English: United States Internal Revenue Servic...

Image via Wikipedia

The casual observer may be forgiven for thinking that last month’s announcement by the Israeli Income Tax Authorities of a  new amnesty  program for foreign undeclared income was motivated by the realization that if – as the US authorities close in on tax evaders – Israel does not act fast, all the “captured” tax of US citizens living in Israel will flow into the coffers of the US Treasury.

 

Back in 2005 the ITA started a Voluntary Disclosure Program to enable Israeli tax residents to come clean on their undeclared income. The scheme, which was open-ended,  offered immunity from criminal prosecution but not much else. The announcement in November 2011 that Israeli residents coming forward by the end of June 2012 could hope to pay the tax, without interest or penalties, on undeclared foreign income was a far more tempting proposition.

The conditions under which the foreign undeclared income is eligible for the amnesty, beyond the requirement that the applicant has broadly not been caught red-handed,  are flexible – but the sample list given by the ITA provides an indication as to the  extent that this was aimed at immigrants: undeclared income from foreign assets inherited from, or gifted by,  a foreign resident; undeclared income from foreign assets that were purchased using funds that arose from income taxed in Israel or income that was not liable to tax in Israel; and undeclared income from foreign assets that only became liable to tax from 2003 when the Israeli system moved from a largely territorial basis to a worldwide basis. 

Remembering that  Israeli-born residents were heavily restricted in their ability to invest legally abroad until the end of the last century, the bias towards Olim from “Western Countries” (which is a euphemism for the US, since the English, French, Canadians and others are just a statistical error in the ITA’s worldview of lost tax) is obvious.

Now that the IRS has won the battle in Switzerland and  should  soon finish bayoneting the wounded, it is widely rumored that the next stop on its tax-grabbing crusade will be the Holy Land. Hence,  the timing could not be better for the ITA to step in and suggest that people pay up in Israel, which in most cases has the first right to tax. This may have a mitigating effect on subsequent disclosure to the IRS, given its newly instituted softer approach to dual citizens (see earlier post), especially where they have declared the income abroad – but it is too early  in the day to draw any firm conclusions.

The potential downside in the whole affair is that any application under the amnesty is to be considered by a Star Chamber of senior income tax officials. There is a promise  that, even if an application is rejected,  the facts will not be used in evidence elsewhere.

When I read this, it reminded me of my first year in High School. There was a particular teacher who had an unfortunate habit of boxing pupils around the ears (which, judging by his level of intelligence, is probably what happened to him as a child). We quickly learned, as he approached, to raise our hands to cover our heads. He would then go through the standard ritual (which took longer each time, as the months rolled by) of telling a poor victim to put his hands down because he was not going to hit him; I do not need to finish the story.

However,  in practice, it seems that it may be possible to initially present the facts to the ITA anonymously and only name names when it is fairly apparent that the application will be accepted.

Overall, these are interesting times for people who have undeclared income and there is a window of opportunity that  could be, for many, the Last Chance at the OK Corral.

The best of times, the worst of times

As 2011 prepares to hang up its boots,  closure is finally coming to one of the finest specimens of legislative panic in recent Israeli history.  With the coalition government resembling  a concoction of weird and wonderful characters from the Complete Works of Charles Dickens and the middle-classes appealing “Please sir, we want some more”, the stage was set  mid-year for a roller coaster autumn full of surprise twists and turns.

 Following a summer of social protest  over the lack of economic fairness in the country and formation of a committee to recommend ways to back out of the “No Thoroughfare” , early fears of a politically motivated Estate Tax – always more of a rabble pacifier than a revenue earner –  gradually abated.  Then there was the proposal to apply a 2% “supertax” on the wealthy which fell off a cliff at the last moment (but might experience one of those miraculous literary recoveries and come climbing back up next year).  Meanwhile, lurking in the background was the perennial  threat of a National Insurance hike: we had already experienced the temporary doubling of the National Insurance  ceiling which followed, about a decade ago, the temporary total cancellation of the National Insurance ceiling which had meant at the time a whopping effective top marginal tax rate of 67%.

The amazing thing, however, is that what finally got thrown up, whether you agree with it or not, makes sense – like the unusually tidy endings of Dickens’s Christmas stories.

The marginal tax rate came to rest at 48% – a clear statement of policy that individuals should be left with more than half their income in their hands (until the government decides otherwise); national insurance was put back in its traditional box with its traditional ceiling; tax on passive income was hiked from 20/25% to 25/30%. What is more, it was not an immediate knee-jerk, but imposed from January 2012 giving taxpayers the chance to sensibly plan the transition – including dividends at the 25% rate in 2011 as well as 2011 bonuses and the theoretical sale of assets – although time is fast running out.

 

Of course, being Israel, not everything has gone totally smoothly. While legislation raising the tax on passive income has passed, the tax authorities and legislature seem to be struggling with the updating of Regulations which, given that they basically involve the crossing out of one tax rate and replacement with another, could be done by a five year old with a spirograph. This means, for example, that unless the  authorities get their act together by the end of this week, public companies paying a dividend in January 2012 face the dilemma of whether to deduct the new rate at source (which is the recipient’s tax liability) or follow the existing  Regulation for tax deduction that has not yet been updated and leave the recipient with the obligation to file a tax return (which, in the case of foreign resident recipients is normally a theoretical point).

 

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