Tax Break

John Fisher, international tax consultant

Archive for the tag “Israeli court case”

Where are the clowns?

Why does she trust him?…

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

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

No idea…

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

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

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

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

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

Ladies and Gentlemen! Roll up for the appeal!

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