Tax Break

John Fisher, international tax consultant

Archive for the tag “Israel tax”

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

Not subject to tax

Corbyn must have been thinking of her

‘It’s on in the morning, usually we have it on some of the time’.

That was the answer, a couple of days ago, to the question: “Do you sit down to watch the queen’s Christmas broadcast, Mr Corbyn?’ For the uninitiated, the Christmas message to the monarch’s subjects has been a cornerstone of British tradition ever since the present queen’s grandfather, George V, delivered the first radio broadcast, written by Rudyard Kipling, in 1932. Mr Corbyn, the man who may be kissing Her Majesty’s hands this Friday morning, might be forgiven for getting the time wrong – after all, the speech hasn’t ALWAYS been broadcast at 3 o’clock in the afternoon; in 1932 it went out at five past three.

In short, Britain’s possible next prime minister doesn’t seem to buy- in too much to the ‘monarch’ and ‘subject’ game.

Perhaps presciently, the recently ratified protocol to the Israel/UK double taxation treaty (see Tax Break January 27, 2019) which will come into force in 2020, dropped the word ‘subject’ in wholesale fashion.  That appears to be a blessing for Brits transferring their tax residence to Israel.

Why?

Aimed at the Labour Party, we hope

The treaty, ratified in 1962 and updated by the previous protocol in 1970, suffered from two nasty blights that together offered a highly effective stranglehold on tax planning. The first was a clause near the beginning that relieved the paying country from offering treaty relief (reduced withholding tax or exemption from tax) to the extent that the income was only taxable in the other country ‘if remitted to, or received in’ that country. This covered quirks in both the UK and Israeli tax systems at the time, the UK charging certain types of resident to tax on a ‘remittance’ basis (still the case – British tradition dies hard), and the Israelis charging passive income to tax on a ‘received’ basis (abolished in 2003). The second was a peppering of the treaty with the term ‘subject to tax’. Dividends, interest, royalties and capital gains were only treaty relieved if they were ‘subject to tax’ in the other country. There was much debate as to what ‘subject to tax’ meant, but whatever it meant, the tax authorities tended to think it meant something else. As a result, when Israel introduced its 10 year exemption period on income from foreign sources for new and veteran returning residents, HMRC gave it a Churchillian salute – the treaty didn’t apply.

Well, in the new protocol, the remitted/received clause disappeared from the beginning of the treaty, only to reappear in substantially identical format at the end. But, like with Mr Corbyn, ‘subject’ appears to have been a dirty word to drafters – those ‘subject to tax’ clauses have been swept away.

Had the British drafters cottoned on that Israel had overhauled its system of taxation in 2003, they might have replaced the word ‘received’ with something more apt to catch the 10 year exemption which does not tax on receipt or remittance– but they didn’t. And there are no ‘subject to tax’ restrictions on passive income. That would seem to imply that new residents should, for example, be eligible for reduced 10% taxation on interest even though they are exempt from tax in Israel, and owners of copyrights or patents could be totally exempt on their royalties, not to mention recipients of pensions.

These are just musings. HMRC could, I daresay, look for loopholes and, in any event, anyone thinking of trying to take advantage of the situation must take advice from a UK tax expert before contemplating diving in.

What right-minded voters wish for Corbyn on Friday morning

As for the British General Election – I hope Mr Corbyn remembers to turn on his TV for the results. They are due in the early morning, rather than the afternoon.

Service and tax included

You get the idea

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

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

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

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

Tax planning doesn’t always go right

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

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

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

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

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

Being nicked for VAT is not a joke

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

Leaving (eventually) on a jetplane

It’s got a better chance

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

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

Trying to make sense of the system

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

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

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

‘What am I supposed to do with it?’

‘I don’t know.’

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

‘No’

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

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

‘So, I will chuck it in the bin.’

‘As you wish.’

Phone slammed down.

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

Some people will do anything to get away

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

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

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

Lost before translation

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

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

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

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

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

In case you’ve never seen it

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

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

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

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

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

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

Those lazy-hazy-crazy days of summer

Read more…

An actor walks into a Bar

Not all Penguin books made it to court

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

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

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

Hardly the first actor to walk around in a hat

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

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

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

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

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

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

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

Where shall we do this scene?

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

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

 

The long and winding road

They even had a fab song called ‘Taxman’.

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).

The dividends boomeranged back to Israel

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.

Arks were a bit passe by the third millennium

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.

Unpredictable

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.

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