Money Shekels bills 521.
(photo credit: Courtesy)
The Israel Tax Authority will shortly decide on measures to close a loophole in
the taxation of dividends, people familiar with the matter told Globes
Tuesday.
The committee reviewing the two-stage tax method will advise Tax
Authority director-general Yehuda Nasradishi to change taxation rules, so that
dividends will be distributed only on profits after company tax has been paid,
and a dividend distributed from accounting profits on which company tax has not
be paid will be liable to additional tax, the sources said.
If Nasradishi
accepts the recommendation, hundreds of millions of shekels a year would be
collected in dividends taxes, they said.
Under the current two-stage
method, a company tax of 24 percent is paid first, and the 25% dividend tax is
only paid after profits have been distributed to shareholders. To date, no
specific definition has been set stating the source of profits on which
dividends may be distributed.
Consequently, companies often distribute
dividends from profits on which no company tax has been collected. As a result,
shareholders withdraw profits at a reduced tax rate, effectively saving, at
least temporarily, the company tax. This saving is sometimes absolute and
final.
The problem has greatly expanded in recent years since the
introduction of International Financial Reporting Standards (IFRS), which in
certain cases allow the revaluation of assets that can create large accounting
profits on which no tax is paid. This accounting reform created accounting
surpluses on which the company tax is not collected in the first stage, because
the revaluation does not create a tax event, and, after a period of time, the
revaluation is distributed as a dividend.
“The question arose whether we
at the Tax Authority should ignore the act of revaluation and tax only the
receipt of the dividend, or whether we should also create an additional tax
event,” a top Tax Authority source said. “Do we want to see the full tax as in
every distribution that reaches the final shareholder.”
In view of the
changes in accounting rules and other changes in the market in share buybacks
and capital reductions, in early 2009, the Tax Authority set up a committee to
review this tax lacuna. The 10-member committee has a mandate to examine three
issues: taxes on capital reductions, buybacks and dividends on revaluation
profits.
“The committee’s recommendations will have a huge effect on the
economy,” a Tax Authority source said. “We’re talking about billions of shekels
on capital reductions, dividends on revaluation profits and buybacks. It is not
for nothing that the committee has been working hard for two years, and its
recommendations have still not been submitted. This is a weighty matter, and the
committee is doing important work and reviewing all its options to prevent
future problems as much as possible.”