Your Taxes: Is Israel the place to be?

Is Israel the place to be, from the tax and economic point of view? This is a broad question, and here are a few of the factors that may be relevant.

Immigrants and returnees

New residents can enjoy an exemption from Israeli tax on non-Israeli-source income and gains for 10 years. This also applies to “senior returning residents” who previously lived abroad for 10 years (lesser benefits apply if they lived more than six but less than 10 years abroad). An Israeli resident is basically someone whose center of living is in Israel. No exemption applies to work done physically in Israel.

The tax situation should still be checked out in every other country concerned.

Nevertheless, for those with overseas investments and/or international business operations, this 10-year Israeli tax holiday can be highly beneficial if everything is properly structured.

Are Israeli taxes high?

Israeli taxes are below average according to statistics from the Organization of Economic Cooperation and Development (OECD). The OECD consists of 34 of the world’s leading economies, and Israel joined it in 2010.

Israel’s tax revenues represented only 32.4 percent of GDP in 2009, which was better than the OECD average of 33.8%.

And in the case of a family where one parent earned the average wage and the other earned two-thirds of the average wage, their combined “tax wedge” was 12.5% of gross wages in 2011. This was better than the OECD average of 20.5%.

As for companies, total Israeli taxes on profits, employment and other items totaled 31.2% of profit in 2011, according to the World Bank, which was better than the OECD average of 42.7%. Some other countries have much higher labor taxes.

Can you do business easily in Israel?

In a World Bank survey on ease of doing business, Israel was ranked No. 34 out of 183 countries in June 2011. Singapore was No. 1, Hong Kong was No. 2, New Zealand was No. 3 and the US was No. 4. The Israeli ranking reflected a variety of factors, including starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, trading across borders, enforcing contracts, resolving insolvency and paying taxes.

As for paying taxes, Israel was ranked No. 59, having regard to the tax rates, as well as the need to spend 235 hours on average to make 33 tax payments per year, according to the World Bank.

Last Pessah, the director of the Israel Tax Authority sent taxpayers in business a greeting that promised increased efficiency in the coming year. This is thanks to the requirement to file personal tax returns online and the need to use an accountant on the online tax service for professionals, known as Shaam.

What about quality of life?

Is it all worth it? The United Nations publishes a “well-being” survey, known as the Human Development Index. In 2011, Israel was ranked No. 17 out of 187 countries surveyed, which is considered “very high human development.” This is based on a life expectancy of 81.6 years, 11.9 mean years of schooling and gross national income per capita of $25,849. Norway was No. 1, with a life expectancy of 81.1 years, 12.6% mean years of schooling and gross national income per capita of $47,557.

Israel spends 5.9% of gross domestic product on education and has school enrolment of 91%. This is somewhat better than 3.8% expenditure and 35.5% enrolment in education in Egypt, for example.

Is there a global Jewish economy?

That is hard to say. But in recent years anecdotal evidence suggests that Israeli tech companies have benefitted from venture-capital investment, partly by Jewish investors from around the world.

The risks can be great, but so can the payback. And Israeli companies have become increasingly export orientated because the Israeli market is too small for them.

To sum up

Israel has come a long way. Very high quality of life, tax rates below international norms and a respectable score for ease of doing business. What more could anyone want? As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.com

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