Report on 'get out of jail' tax clause made public

While not exactly a "get out of jail free" card, tax evaders are increasingly taking advantage of the "koffer" clause, written into Israel's tax law more than 30 years ago, to "buy" their way out of incarceration in tax matters.

By MATTHEW KRIEGER
June 10, 2007 07:30
4 minute read.

While not exactly a "get out of jail free" card, tax evaders are increasingly taking advantage of the "koffer" clause, written into Israel's tax law more than 30 years ago, to "buy" their way out of incarceration in tax matters. While this has been common practice since the 1970s, according to Henriette Fuchs, a tax specialist at the law firm of Tadmor and Co., last year the State Comptroller informed the Justice Ministry and the Tax Authority, the two bodies responsible for enactment of the clause, that they must make public their koffer policies as well as the number of yearly cases and the amount of money collected from those cases. The first report was released in late April. "The policies of the responsible authorities as to the criteria of who could be eligible 'to walk,' and against what ransom, have always been found unclear and not-transparent ... this publication is thought to enhance transparency to the public of the policies, treatment of equal cases equally and a general raise of awareness to the phenomena," said Tali Yaron-Eldar, a former income tax commissioner and now a tax partner at Tadmor. Yaron-Eldar, who was responsible for passing Israel's tax reform laws in 2003, also noted that the comptroller had initially wanted the names of the offenders to be published, as well. However, this notion was deemed "overkill" by the ministries and promptly rejected, since part of the attraction for a tax-evader to pay the koffer penalty is that his identity is not revealed. The koffer (atonement) clause, was introduced in 1976 alongside the country's Value Added Tax (VAT) law, as a way out of jail time for violating the VAT law, which carries severe punishments should it be broken, said Rany Schwartz, a former prosecutor for the tax authority and currently a lawyer at Tadmor, who noted that most countries have a similar procedure in place. Over time, the clause has come to include violations of income tax laws, as well, said Fuchs. Last year alone, she calculated, the Finance Ministry collected over NIS 13 million in penalties paid by tax violators who preferred to pay fines ranging from NIS 20,000 to NIS 250,00, depending on the type and scope of the crime, in lieu of facing criminal prosecution and jail time. "It is clear that the beauty of the 'koffer' for the authorities is that they save themselves the effort of the criminal pursuit, gain a sum of money for the treasury and catch the unpaid taxes; an effective tool for enforcement of tax payment from the taxpayer," she said. Under regulations within the Tax Authority, one who chooses to take advantage of the koffer clause must still pay the backlog of taxes, plus the koffer penalty, which can be up to 40% of the withheld taxes, although it has become more about what the offender can afford, noted Schwartz. Not anyone who wishes, however, can escape jail time by paying the koffer penalty, he added. If one can't afford to pay the fine, if the unpaid tax amount is determined to be too high by the Justice Ministry, or if Attorney General Menahem Mazuz does not approve, those violators will be criminally prosecuted and, if found guilty, sentenced to punishments ranging from six months of community service to four years in prison. They will, however, be absolved from paying outstanding taxes. And, it's a one-time deal; those who evaded jail time by paying the koffer penalty are not allowed to take advantage of it a second time. Under the system established by the Tax Authority and the Justice Ministry, once it is suspected that a tax violation has taken place and the authorities open an investigation, the potential criminal can opt to pay the koffer despite there not yet being sufficient evidence to indict him. "Its a poker game," said Schwartz. "The tax violator might not be granted the option of paying the koffer once he has been indicted, so he pays early and saves himself from any potential jail time. On the other hand, it might turn out that not enough evidence will be found for an indictment." According to Fuchs, more than 450 people have taken advantage of the koffer clause to escape criminal proceedings over the last three years with most of the offenses stemming from VAT violations. Still, she is not convinced it is a fair set-up. "Is is right for someone that has money to pay his way out of criminal proceedings, while someone else who committed a similar crime but does not have the financial means to pay the fines should have to while away his time in jail?" she asked. "There needs to be more regulatory scrutiny," she added. Leon Harris, international tax partner at Ernst & Young Israel, said publication of the koffer report will help provide needed scrutiny, claiming that it is a good thing for the country as it contributes to, and helps advance, the system of checks and balances - a "necessity" for any democratic nation, he said.


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