Your Taxes: Breaking down budget proposals

The Israeli budget process has more twists than any Hollywood thriller. On May 7, the government published a detailed economic plan for 2013-2014.

This included the proposals recently reported in this column and more. By May 14, the cabinet had already approved the proposals albeit with changes. The revised proposals will now be turned into a bill and sent to the Knesset in June for debate and possible enactment. You can assume there will be more twists and changes before it’s over.

Below, we review briefly some of the newer proposals.

VAT and corporate tax rates

First, tax rates are expected to go up. The standard rate of VAT is expected to rise from 17 percent to 18%. There was a proposal for foreign visitors to Israel to start paying VAT on accommodation and tourist attractions at a rate of 18% instead of 0% but it seems that proposal was rejected by the cabinet. Instead, it is proposed to set the standard rate of company tax from 25% to 26.5%.

As for industry and technology, changes have been proposed for “preferred enterprises” under the Law for the Encouragement of Capital Investments. It seems that from 2014, preferred enterprises in development area A will pay company tax at a rate of 10% in development area A (instead of 7% in 2014 and 6% from 2015). It also seems preferred enterprises will pay 15% company tax from 2014 (instead of 12.5% in 2014 and 12% from 2015). Section 72A of the Law for the Encouragement of Capital Investments indicates that tax breaks will not be changed after inception for a “privileged enterprise,” which is the predecessor of a “privilege enterprise,” so any such change is against the spirit of the current law.

Also, subject to any tax treaty, shareholders will pay 20% withholding tax on dividends from any preferred enterprise, commencing in 2014 instead of 15% now. You can expect a stream of dividends this year from public and private Israeli industrial and tech companies.

Personal tax rates

It is proposed to raise all personal income tax rates by 1.5%. According to the proposals, the 48% upper tax rate would rise to 49.5%. However, there is also currently a 50% tax rate, due to 2% surtax for people who make more than NIS 811,560 per year. So it is unclear whether the top rate of tax for individuals will be 49.5% or 51.5%. What is clear is that housewives will start paying national insurance contributions of NIS 162 per month according to the proposals.

Revaluation gains

The tax law has not yet taken IFRS accounting on board.

One of the resulting questions is how to tax dividends paid by a company out of revaluation gains. It is now proposed to treat revaluation gains as taxable capital gains from a deemed sale and repurchase of the revalued assets at their revalued value. The cost basis of those assets would be “stepped up” to that value for future depreciation and capital gains tax purposes. This means tax will be accelerated but it may also facilitate tax planning in some individual cases.

Real estate

With regard to real estate, numerous changes are proposed.

For example, it is proposed that an individual who owns more than one home in Israel will lose the present exemption from land appreciation tax (a capital gains tax) upon a sale – instead 25% tax is proposed from 2014.

Israeli residents who own only one home in Israel will apparently be exempt if no exemption was claimed in the previous 18 months. Nevertheless, it is proposed to tax sale gains to the extent the home sale price exceeds NIS 5 million (a mansion tax). And it is proposed that foreign residents will lose their sale exemption altogether. It remains to be seen whether this is allowed under anti-discrimination in Israel’s tax treaties.

As for acquisition tax on the purchase of a home, it is proposed to raise the rate to 8% to the extent the price exceeds NIS 5 million (another mansion tax). There is another controversial proposal to impose 3.5% acquisition tax from the first shekel on any home purchased by someone who owned another home in the past. This is criticized as hitting anyone moving home or marrying a spouse who already owns a home.

Pensions, etc.

It is proposed to reform the present complex system of tax breaks for pension and other contributions. There would be a 35% tax credit for contributions to pension plans, life insurance and disability insurance. But various new limitations would apply – no more than 15% of an employee’s income. It is proposed that employer contributions may be exempt regarding salary of up to 15,000 per month.

As mentioned, it remains to be seen what will be eventually legislated. But the chase for tax revenues is on.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

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The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.