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Archive for the tag “Israel”

Playing the residency card

The_Goon_Show_(cast_photo)

Who were they?

On a recent bus tour of Barcelona, the  recorded commentary declared the ‘immortal’ words of exiled Catalonian  President Josep Tarradellas on his return in 1977: ‘Citizens of Catalonia, I am here’. This immediately conjured in my mind the immortal line from the BBC’s Goon  Show: ‘Everybody’s got to be somewhere.’   Great philosophy it aint, but the concept of ‘being here’ has been a cornerstone of modern international taxation since its salad days a hundred and fifty years ago – ‘where you are’, rather than ‘who you are’.

Despite an intuitive tendency – demonstrated countless times over the years in meetings with prospective clients – to think that international taxation depends on ‘who you are’ (French, German, Spanish, Catalonian), citizenship actually plays a minor role in establishing where direct tax is paid. There are only two countries that tax on the basis of citizenship. One is the African state of Eritrea. The other – slightly larger and louder – is the United States of America. Everyone else looks at ‘residence’ – essentially ‘where you are’. The only time citizenship kicks in is when two competing countries tied by tax treaty are totally stumped.

The confusion is forgivable when you open international taxation journals. Recent news included Montenegro’s joining the ranks of those countries selling citizenship for a mess of pottage. For as little as a  250,000 Euro investment and 100,000 Euro donation to the Government, it will be possible to achieve citizenship within 6 months.  Apart from being delightfully situated next to Bosnia and Serbia (complete with NATO membership), it offers the bonus of potential EU membership by 2025 (if the current European order lasts that long), with the advantage of  access to the rest of the EU. Apart from Americans (and perhaps wealthy Eritreans) who might court the idea of a second citizenship to enable them to give up the first (thus avoiding draconian tax reporting and, possible, additional tax payment), the principal attraction of these schemes is Visa access for those from even less popular countries (and EU access, where relevant). Tax doesn’t get much of a look-in.

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You would also want another passport

Israel is firmly in the ‘residence’ camp and its statute law is well-developed. It is therefore surprising that, in a recent High Court appeal decision concerning a poker player who claimed to be resident nowhere (‘everybody’s got to be somewhere?’), one of the justices declared that a person who is a resident and citizen of Israel, especially one who was born and raised in Israel, even if he goes abroad for a prolonged period, will only shake off residency if he does something clear to break that residency and establish residency elsewhere. Examples cited are renouncing citizenship, and sale of house and assets in Israel. Less convincing would be academic studies or a foreign company posting.

This is diverging a long way from ‘where’, and giving a degree of importance to ‘who’.

As Israel is a member of the OECD and signatory to many double tax treaties based on its model, treaty interpretations will take precedence over domestic law, although there may be an increase in the incidence of mutual agreement procedures. But, it will be interesting to see how matters develop with non treaty countries, as well as the rare situations where an individual claims ‘not everybody has to  be somewhere’.

No flies on them, mate

Some people will go to extreme lengths not to visit Australia

Some people will go to extreme lengths not to visit Australia

Filling in the immigration card at the start of the descent into Melbourne International Airport earlier this week, I could not help but chuckle as I checked the “No” box against the question “Do you have any criminal convictions?”  I was unavoidably reminded of that hackneyed joke, attributed to the late Tony Hancock and especially popular among up-ourselves Poms, who is reputed to have answered: “I didn’t know it was still a prerequisite”.

One of the purposes of my visit to Australia is to speak at various events on the topic of the Business and Taxation Environment in Israel. As, a few weeks prior to my trip, a senior Israeli Government Minister had done the rounds here, I decided to ask him what he had spoken about. “Business and Zionism – I avoided politics.” When I replied to his enquiry as to my subject: “Taxation”, he slapped me on the back and suggested that perhaps I should speak about politics.

Remarkably, in the three weeks since preparing my presentations for the visit there have been no less than two momentous events directly affecting the taxation environment in Israel as well as an indirect one. Luckily, my powerpoint slides and the bloke talking around them, are sufficiently vague for nobody to have yet noticed the hurriedly shoe-horned bits. But the trip is yet young.

Just trying to do the right thing

Just trying to do the right thing

First off was a proposed amendment to the Income Tax Ordinance, tabled in the Knesset on January 29, that – if, and when passed – will empower the Income Tax Authority to demand automatic supply of information on  foreign residents’  income in Israel (primarily from financial institutions) and allow its voluntary transfer to foreign tax authorities on the basis of an international agreement that is not necessarily, as at present, a double taxation agreement. This, of course, smells of the brown-nosing that in school earned a thoroughly deserved duffing-up behind the bicycle shed by ones classmates. But the Israeli authorities are only bowing to the inevitable pressure from the G20 and OECD to ensure worldwide automatic exchange of information – one of the main tools in the international fight against tax evasion.  Passage of the law will pave the way for Israel to become the umpteenth signatory of the OECD’s sexily named “Multilateral Convention On Mutual Aministrative Assistance In Tax Matters” (MCOMAAITM…just kidding), which provides a legal basis for countries to agree on the said automatic exchange of information.

Confirming the timeliness of the Israeli move, on February 13 the OECD met its deadline to provide “A Standard for Automatic Exchange of Financial Account Information” (ASFAEOFAI….never mind) in time for the meeting of G20 Finance Ministers and Central Bank Governors on February 22 – 23 in Sydney (where I hopefully arrive just as they are leaving – it is all in the timing). This standard is based on the US FATCA rules and, when implemented either through bilateral or multilateral agreement, will require financial institutions to do those things the Israeli proposed legislation aims to facilitate. Automatic exchange of information will not be required where the other party does not reciprocate (you scratch my back and I’ll scratch yours) or where the other side is unable or unwilling to guaranty secrecy (being a brown-nose is one thing, but never a sneak).

However,  perhaps the most momentous event came to light early this morning (which was yesterday in Israel). I awoke to discover that an eminent  Tax Lawyer-friend with whom I had worked closely until I boarded a flight for Hong Kong last Sunday evening,  had been appointed a District Judge along with another equally eminent Tax Lawyer who was not a friend and with whom I had not worked closely at any time before boarding that flight for Hong Kong last Sunday evening.  It is evidently rare in Israel for partners in Law firms to be appointed directly to a senior court – but this reflects a welcome seriousness of purpose on the part of the Israeli authorities and raises the bar on the professionalism of the judiciary in deciding tax matters.

Another way of dealing with the latest mad-cap trust legislation

Another way of dealing with the latest mad-cap trust legislation

All in all, when I started preparing my presentations in January the Tax Environment was looking far more mature than at any point I can remember. The events of the last three weeks have only enhanced that position. There is, however, one exception: the new mad-cap trust legislation – concocted by the Tax Authority –  that came into force on January 1. The amended law needs to be placed on a convict ship and transported to Australia, never to return.  While I have every respect for the officers of the Income Tax Authority, it would not be a crime if one day the Finance Ministry were to take a leaf out of the Justice Ministry’s book and decide to appoint partners from major  law and accountancy firms to senior positions in the Tax Authority. After all, the present Australian Tax Commissioner is a retired partner of one of the Big 4. No prizes for guessing which one.

Reach for the sky

Dutch landscape. Anyone for Mars?

Dutch landscape. Anyone for Mars?

A  story  about a Dutch company that did the rounds of the world’s press on April 23 got me checking whether the Netherlands, ever the laid back pot-smoker of Europe, celebrated April Fools’ Day a few weeks late. In a grand press conference it was announced that candidates are invited to apply for a one-way ticket to Mars sometime in the next decade. The project is to be funded by  Reality TV rights. Welcome to the 21st century.

While Britain has a Royal Society for the Prevention of Cruelty to Animals, it does not have a Royal Society for the Prevention of Cruelty to Dumb Humans, so I was not surprised when the BBC World Service cornered their prey a few days later. It turned out that one of the first people to put their name down for the flight was a young man with a distinct Lancashire accent. Now, if you are not a Brit you should understand that, while the BBC World Service has (highly competent) presenters from Uganda, South Africa, Canada and South-East England, it does not have many Lancastrians on its books. Someone searching for a broad Lancs accent on the BBC would be better-off tuning into Premier League Darts or The World Snooker Championship. This is entirely unfair to natives of Lancashire who are, of course, every bit as intelligent as everybody else,  but it is an unfortunate urban fact.

Asked why he had applied, the Lancashire lad mentioned the appeal of Reality TV (OMYGOD) and then went on to talk of a new Frontier. At this point I clasped my steering wheel tight as I zoomed along the highway and braced myself for the inevitable G Force comment that was  about to pin me to the back of my seat. And it did. He calmly told the interviewer that he wanted “to boldly go where no man has gone before”. Aaagh!

Talking to Israeli tax officials over the last week, all that was missing was that ping-pong-ball-stuck-in-the-back-of-the-throat Lancashire accent. Included in the just released preliminary draft of the Government’s Omnibus Bill were the first significant adjustments to the international tax provisions of the Income Tax Ordinance in 10 years.  Listening to these highly intelligent people one could have been forgiven for thinking that they had just proposed the most radical shake-up of the tax law this side of the turn of the Millennium. A new frontier.

In reality, the amendment is less Starship Enterprise and more Apollo 13; less Captain Kirk on the ship’s panoramic deck and more Jack Swiggert trying to patch up the mess in the service module.

Come out with your tax opinions above your heads!

Come out with your tax opinions above your heads!

The main thrust of the proposal is in the area of CFC (Controlled Foreign Corporations) where many of the gaping holes in the legislation will be closed. As regards the fundamentals of the CFC regime,  on the one hand, the law will be expanded to include companies with more than a third (previously a half) passive turnover or profit while, on the other hand,  the CFC cut-off tax rate will be reduced to anything above 15% (currently 20%). The sad thing is that they did not use the opportunity for a clear re-think of the desirability of the law in its present format. It would have been nice to see some bold proposals rather than the S.W.A.T team peering nervously around every corner in search of possible tax avoidance schemes as they inch towards their target.

There is a change to the calculation of Foreign Personal Service Company income which closes a much abused loophole using companies in treaty countries, and a very controversial proposal to require new residents to report their foreign income. Under a 2008 amendment new and returning residents are exempt from tax on foreign income for 10 years. Until now they have also, perfectly reasonably, been exempt from reporting such exempt income. Perhaps not much longer.

But the daddy of them all is the proposed change to the 2006 Trust provisions. The Trust provisions have, since their inception, given rational  advisers a headache. They were a valiant and, largely successful, attempt to prevent tax avoidance but, in their over-enthusiasm, left Israel taxing foreign trusts when there was no connection to Israel not to mention other weird and wonderful outcomes.

The new provision, although  seeking to tax previously untaxed income from trusts settled by bona fide foreign residents,  offers a glimmer of hope regarding those trusts where a settler dies and all beneficiaries  depart for other shores.

Somebody has been reading the wrong book

Somebody has been reading the wrong book

The trouble is that, while they have had since 2006 to think about trust amendments,  the authorities have managed to come up with some of the most ill-conceived mis-drafting seen in years. Together with colleagues from other accounting and law firms, I have been trying to join the dots all week. It has been like trying to get a sleeping bag back in its sleeve – every time you think you are there, something bulges out somewhere else. Perhaps they would do well to take a leaf out of the Beatles’ book; it is said that they composed some of their best lyrics when they were stoned.

I am reminded of a Yiddish expression which, roughly translated, goes: “He spelt the word ‘Noah’ with seven mistakes”.

It will  be interesting to see if the authorities get all the bugs sorted out in  the formal draft. In the meantime: “Houston, we have a problem”.

For tax advisor and country

"Tax Resident Kane" doesn't have the same ring to it

There is a framed football shirt hanging on my son’s wall. It is half blue, half white – the blue half sporting the insignia of the Israel Football Association and the white half the Three Lions of England. Scrawled in indelible marker across the English half is the inscription “Good Luck, Bobby Charlton” ( for the benefit of American readers -and absolutely NOBODY else on earth – Sir Bobby Charlton is to English football what Babe Ruth was to American baseball).

My son is part of an ever growing phenomenon in the modern global village- the dual citizen. The Economist ran an article last week questioning the continued relevance of citizenship as a basis for a person’s rights and responsibilities vis a vis a particular country given the almost ad hoc way in which citizenship can be acquired. The recommendation, in a world where the military draft is becoming increasingly rare, was for tax residence to supersede citizenship.

Hallelujah!  If you have been wondering what we international tax advisors  are going to do for a living when the European Union institutes the Common Consolidated Corporate Tax Base (CCCTB) and the US Congress adopts a Territorial Tax Basis – we are saved!  As soon as The Economist’s proposals are accepted by the world’s legislatures anybody wanting to do whatever citizens do in a country will need to prove  tax residence, and that means fees.

At a cursory glance the concept of residence looks fairly consistent internationally – many countries insisting that, if an individual spends over 183 days (six months in plain speech) within their borders, they are resident. But, as the Eagles said:  “You can check out any time you like, but you can never leave” – in addition to differing  applications of the 183 day rule between a single tax year and straddling two tax years, nation after nation traps individuals with further multi-year calculations  as well as a host of additional tests that point in only one direction – the national piggy-bank. Warring tax authorities are forced into the tie-breaker clause in the double tax treaty they hopefully concluded earlier and, given the subjective nature of some of the tests, they often end up fighting it out around a negotiating table.

What does all this mean for this brilliant alternative to citizenship? Fast forward to 2015. Giovanni, the Italian plumber we met a few posts back  who is now working under Single Market rules in the UK,  turns up at his local Town (City) Hall on March 15,  to register to vote in the upcoming  General Election. The clerk asks for proof of his days present in the UK since last April 5 (the potty fiscal year end there). Giovanni proves 200 days but the clerk, after calling the tax residence hot line,  points out that in calendar year 2014 he was probably still resident in Italy under Italian law since he was present there for 239 days in the calendar (fiscal) year, and, it was as yet unclear, whether he would be similarly classified in 2015 depending on future circumstances. He tells him to go and get a tax opinion. Giovanni, who despite being a plumber is not flush with cash, tells the clerk that he cannot afford an opinion. “In that case”, the clerk informs him, “We can approach the Italian authorities and institute Mutual Agreement Procedures under the tax treaty”. Being Italian, Giovanni has an inbred aversion to tax authorities, especially those he has not been reporting to for the last thirty years, so he scrams fast –  internationally disenfranchised.

Then there is  the situation of tax exiles. On the assumption that, as long as there is tax there will be tax exiles, in a world of economic growth their numbers are likely to increase. So it would seem quite possible that, in the foreseeable future, Monaco and Andorra could become so popular that one or both of them could claim a permanent seat at the United Nations Security Council.

World War III

Personally, if there is a need to change the current system, I would go for pledge of support to a national football team. When push comes to shove everybody only really supports one team and, although I have never asked my son whether he is for England or Israel, I do recall taking his older brother to an Israel v Argentina game in the early nineties with Diego Maradona playing (Americans -ask your friends). There was almost a riot between Argentine fans and Israeli fans – ironically the Argentinian contingent being made up almost exclusively of people who had fled the Junta in the early eighties and sought and found refuge in Israel.

And if you think there is anything trivial about the football idea, Bill Shankly,the legendary manager of Liverpool famously said: “Some people think football is a matter of life and death. I assure you, it’s much more serious than that.”

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