Tax Break

John Fisher, international tax consultant

Archive for the tag “Israeli tax”

Tell it like it is

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Not a robot? Spot the quotes

A rose by any other name would smell as sweet’. That quote from Romeo and Juliet has occupied my thoughts this last week. As an Israeli judge found recently, the concept is only a ‘truth universally acknowledged’ to the extent the rose is inarguably a rose. And, in the process, the learned gentleman took pains and, dare I say liberties with the law, to rub compost in the face of the Knesset (Israel’s parliament).

Israel has had a Law for the Encouragement of Capital Investment for the last 60 years. Primarily a treasure chest of tax and monetary incentives to further the needs of the economy, it has been touched up and renovated periodically as the needs of the State changed and matured. In 2005, in an attempt to simplify a cumbersome process befitting a formerly socialist country,  a boost was given to those industrial enterprises that exported a pre-ordained percentage of their production.

industrial robotic arm building EXPORT word

Not a robot? You don’t need the word ‘export’ to understand ‘export’.

However, the word ‘export’ had to be expunged from the Law’s lexicon. Offering export incentives threatened a shower of fire and brimstone from the World Trade Organization and, specifically, those with whom Israel had free trade agreements (including the US and EU). So, the sophists engaged to draft the law came up with a need to meet one of the following requirements:

  • Income from a specific market must not be more than 75% of total income;
  • 25% or more of total income must be  from a specific market numbering at least 12 million residents.

That would avoid detection in a word search by nosy foreign governments,  while anyone with a brain that worked in accordance with evolutionary theory could interpret the law as demanding  at least 25% export, with no restrictions on the level of exports to any major foreign country. Why 12 million? Probably because it was a lot more than the population of Israel in 2005 (the number was updated a few years back to 14 million with an annual automatic increase).

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How can we be sure anymore that the number of residents of New Zealand doesn’t include the sheep?

Well, populations have a habit of growing, and by sometime in 2012  Israel’s market, which included the residents of  Judea and Samaria aka the West Bank had grown to more than 12 million, and companies that sold exclusively to Israel decided to claim the benefits of the Law. The tax authorities told them, in no uncertain terms, to go fly a kite.

The courts got involved and agreed with the tax authorities (the tax authorities’ argument had layers not elucidated here). The appeal was heard this month.

Although, at bottom line, the appeal was thrown out, the judge disagreed with the tax authorities that Israel could not, in principle, be included in the second condition, offering a long and reasoned argument. The upshot would be that no exports were required at all – a surprising conclusion. Interestingly, in addition to arguing that exporting was not the clear intention of the law, he completely ignored the first (alternative) condition which, although not negating entirely the Israel-only possibility, made the whole thing Monty Pythonesque.

Benjamin Netanyahu, David Bitan, Oren Hazan

They are going to take the judge’s comments very seriously.

Faith in the judge was restored, however, towards the end of the 39 page judgement. Quoting from some of the committee discussions surrounding the 2005 amendment, he lambasted the parliamentarians for the underhand way in which they had sought to hide the export incentive from Israel’s trading partners, making clear that white man mustn’t speak with forked tongue. If, as a result, they got their wording in a twist, they deserved to be punished. He forcefully suggested that the legislature should update the wording of the law.

There is nothing new, or unique to Israel, about actively confusing laws. Back in the 1850s, the author of Little Dorrit invented a whole government department to promote the idea – the Office of Circumlocution. But, perhaps, times they are a changin.

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