The Knesset has just passed a significant amendment requiring disclosure in certain cases of tax opinions received and tax positions adopted contrary to those of the Tax Authority.
Similar provisions were included regarding value-added tax, fuel excise tax, customs duty and purchase tax. We review below the income tax provisions. The amendment also updates tax breaks for residents of peripheral areas, which are outside the scope of this article.
The amendment may make it easier for the authority to home in on major tax planning where taxpayers obtain a tax opinion or adopt a position at odds with that of the authority. The amendment supplements existing rules that already require certain “reportable acts” to be reported to the authority.
The amendment covers signed written opinions and positions that confer or are intended to facilitate a tax advantage, in one of the following cases:
• Success-based fee of at least NIS 100,000;
• “Shelf planning” opinion mainly unrelated to the special circumstances of the recipient;
• “Shelf planning” opinion provided under conditions of secrecy;
• Taxpayer’s position contrary to the authority’s position.
These are discussed further below.
Tax advantage: A tax advantage is defined as including each of the following: (1) Tax reduction or relief, deferral of a taxable event, reduction in the amount of tax or tax payment on account, or tax avoidance, (2) Avoiding an obligation or liability to withhold tax or expenses or consideration of a loss (sic.), (3) Deferral of the tax payment date.
Comment: This definition looks rushed and poorly drafted.
What about foreign tax credits and the tax holiday for immigrants?
Success-based fee of at least NIS 100,000:
Where the fee could reach a maximum of at least NIS 100,000 for an opinion and is contingent, partly or wholly on the tax advantage generated for the taxpayer.
‘Shelf planning’ opinion mainly unrelated to the special circumstances of the recipient: An opinion with mainly uniform content on the same subject (“boiler plate”), to at least three unrelated recipients within two years and which is mainly unrelated to the special circumstances of the opinion recipient. The provider must notify the third recipient onwards that the opinion is reportable, or face the possibility of a one-year prison sentence...
‘Shelf planning’ opinion provided under conditions of secrecy: An opinion provided at the initiative of the provider and the recipient is committed to secrecy regarding part or all the content.
Exceptions to opinion rules: Taxpayers will not be held responsible for reporting an opinion in the following cases.
First, if an opinion recipient is not notified by the provider that it is a reportable shelf opinion unrelated to the recipient’s special circumstances. Second, opinions regarding any issues being discussed in assessment, objection or appeal procedures regarding the tax year concerned only. Third, Israeli public institutions (charities) are exempt from these rules. Fourth, the rules only apply to an individual or company with income, other than capital gains, exceeding NIS 3 million in the tax year, or capital gains (apparently, the provision is not clearly drafted) exceeding NIS 1.5m. if the opinion relates to such gains.
Taxpayer’s position contrary to authority’s position:
This refers to positions to be published separately for this purpose by the authority on its website after consultation with professional bodies – up to 100 positions per year in 2016 and 2017, and up to 50 positions per year thereafter. But only if the position results in a tax advantage exceeding NIS 5m. in a tax year or NIS 10m. over four years at most.
The consequences: In relevant cases, for the year(s) in which a tax advantage is derived, the taxpayer must attach a form to their annual tax return, and to the annual summary of tax withheld from suppliers (in the case of a business taxpayer).
The form will give summary details of the opinion or position contrary to the authority’s position. If the taxpayer receives a reportable opinion after filing its annual return, it has 60 days to file the reportable opinion form. The taxpayer may also file the contrary position form within 60 days after filing its annual return without sanction.
Opinions do not have to be handed over to the authority as they may be subject to legal privilege...
Effective date: The amendment applies to opinions given from January 1, 2016, and contrary positions reported in returns for 2016 onwards.
Comments: The legislation finally enacted is a vast improvement on earlier proposals that would have required disclosure of virtually all written tax advice. As mentioned, there are open questions about immigrants and foreign tax credits. Other uncertainties relate to tax treaties and transfer pricing.
The authority has on occasion been known to adopt wacky positions on certain subjects in Circulars and Rulings that seem to stretch considerably the existing tax law.
For example, immigrants may be denied their tax holiday if they work less than 40-60 days abroad. And individuals have been deemed to be Israeli residents after spending only 80 days in a year in Israel. Therefore, it remains to be seen whether the authority would adopt quasi legislative powers regarding positions pursuant to the new rules.
As for consultation with professional bodies (Law Society, CPA Institute, Tax Consultants Institute), in our experience the authority is mainly interested in fixing drafting errors rather than amending matters of principle. Since there was little public debate on these provisions before their enactment, let’s hope that public debate will belatedly begin now.As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.