Newcomers are often surprised to learn that Israel has detailed bookkeeping
regulations and businesses must use accounting books and software approved by
the Israel Tax Authority (ITA). Well-known packages from abroad are simply not
recognized here. Even multinational groups with state-of-the-art accounting
systems in California or elsewhere must apply for special approval to use them
If you fail to record a receipt in approved books, or if the
expense amount does not reflect the price of an acquisition or a service, the
ITA can “disqualify” your books and assess you on income estimated to the best
of their judgment.
The resulting tax is sure to be higher than you ever
thought possible. If you don’t have the right accounting package, you could
outsource the accounting to an Israeli accountant, and many do.
about undocumented expenses?
The ITA has just published a circular titled
“Support for Allowing Expenses and/or Costs Claimed.” It deals with missing or
fictitious expense invoices.
Surprisingly, the circular says if you don’t
have documentation to support expenses incurred or assets bought, all is not
lost. It may still be possible to preserve the integrity of the expenditure
requirements of the Income Tax Ordinance.General expense deduction rules
The general rule is that expenses are deductible if they are incurred wholly and
exclusively in the production of income and are related and integral to the
process of generating the income. The bookkeeping regulations require that there
be external documentary support, including invoices from suppliers and
subcontractors. There should also be an external documentation file where the
documents are kept in a way that permits records to be found.
of proof is on the ITA if the books are not disqualified and on the taxpayer if
they are. If the books are disqualified, the ITA can refuse to accept an expense
In the case of Hydrola Ltd. vs Tel Aviv-Jaffa Assessing No. 1,
it was ruled that the taxpayer has primary responsibility for presenting
relevant documents and records that support the expense. But in exceptional
cases in which there are special circumstances, the deduction of expenses may be
justified if alternative evidence exists.What alternative evidence can
be used for expenses?
The circular discusses at length the criteria for the ITA
to assess a taxpayer lacking invoices that substantiate the existence and amount
of an expense or asset, or a taxpayer whose books were disqualified for claiming
VAT on fictitious invoices.
First and foremost, the assessing officer has
discretion whether to accept or reject alternative evidence. He should apply his
experience and use the resources at his disposal for estimating figures. The
assessing officer will also consider the following: • Is there evidence the
expenditure was incurred? For example, did a builder build something on a
building site? Were products used as raw materials or sold? •Was payment made,
for example, by check, bank transfer, etc.? Payment in banknotes will be harder
to prove, and the burden of proof is on the taxpayer.
• Did the other
party report corresponding income? • Is there a signed agreement or contract? •
Review of any valuation; for example, an insurance survey, loan-collateral
review by a financial institution.
• For fixed assets acquired in prior
years, is there an audited fixed-asset schedule for tax purposes? • Records at
other official bodies in Israel or abroad; for example, land-betterment levies
and transfer taxes.
• Corroborative declaration by subcontractors who
report corresponding income.
• Check the subcontractor’s fee by add a
customary profit margin to salaries paid by the subcontractor.
major shareholders’ accounts to see if amounts spent were really pocketed; if
so, such amounts received should be grossed up for Israeli tax
• Check pricing to market surveys.
What about VAT? The
circular points out that there may be cases in which an invoice is acceptable
for income-tax purposes but is not acceptable as a tax invoice for VAT purposes.
For example, the invoice issuer is not registered as an “authorized dealer” for
VAT purposes, or the invoice lacks some of the information that should appear on
a tax invoice.
In other cases, the invoice may be unacceptable for income
tax and VAT purposes if it is a fake or the amount or parties involved are
different than those stated.What should you do?
Always ask for a tax
invoice from suppliers. If you lost it, ask for a copy certified by the issuer
as true copy (ne’eman lamakor
). In any event, you should check the supplier is
listed on the ITA website and whether you should withhold tax from the payment
to the supplier. You’ll need their identity number for this.As always,
consult experienced tax advisers in each country at an early stage in specific
Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.