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).