Yom Kippur is approaching and it seems we must atone for our tax sins and for trying to avoid them.
The latest budget bill currently being debated by the Knesset includes a far-reaching campaign against tax avoidance and written tax advice, with retroactive effect (Draft Law Number 951 published August 31, 2015– Bill For Economic Efficiency (Legislative Amendments For Achieving Budgetary Goals for Budget Years 2015 & 2016), 2015). The bill has passed its first reading and is expected to be enacted in the coming months.
According to the explanation in the bill: “In recent years there has been an increase in Israel and abroad in the use of aggressive tax planning to reduce the tax liability in a way that does not fit in with the intention of the legislature, where the main objective is an improper reduction in tax or avoidance of tax payment. In order to achieve this goal, many taxpayers are assisted by professional Opinions from various sources, including lawyers, accountants, tax advisers, valuers and others, and act accordingly.”What is proposed?
The bill proposes that taxpayers will attach a form to their annual tax return disclosing “reportable tax advice.” This would mean an opinion or any other written advice given to a party, directly or indirectly that facilitates or is intended to facilitate a “tax advantage” (Income Tax Ordinance (ITO) proposed new section 131C).
A tax advantage is defined in the proposed bill as “including any of the following: (1) A tax reduction or relief, tax deferral, reduction of the amount of tax, or avoidance of tax, (2) Avoidance of a duty or obligation to deduct tax or expenses (sic) or to take into account a tax loss, (3) Deferral of the tax payment date, and (4) VAT refunds.
It is proposed that any person who receives reportable tax advice, regarding an act he/she/it performed, or regarding income, profit, expenses, or a loss, whether before or after performing the act or generating the income, profit or expense, shall report this on the form to be prescribed by the ITA Director.
The proposed form would require the taxpayer to specify: (1), the fact that reportable tax advice was received, (2) the act or income that was the subject of this advice, (3) the type of tax issue affected by this advice – deductions, depreciation, income classification, expense classification and any other issue prescribed by the ITA Director.
The commentary to the bill states that the opinion and interpretation of the tax law would not need to be filed with the ITA.
Similar proposals would apply to excise tax, purchase tax and real estate taxation. Sanctions for non-compliance may include 30% of the tax deficit and possibly a year in jail.
These measures, if enacted, will apply to any reportable tax advice given regarding tax returns for the 2015 tax year, which have to be filed in 2016, and thereafter. The Israeli tax year runs from January 1 to December 31. So the proposed measures have retroactive effect for any advice already given any time in the past regarding the 2015 tax year onwards.
The author of this article is an accountant who clearly has an interest as one of the accused parties.
In our experience, most written tax advice is not intended to be aggressive, it is intended to inform taxpayers what the law says. Taxpayers have a right and an obligation to understand the law and to take expert advice when necessary – ignorance is no defense.
Such measures are unprecedented and no other country has similar legislation, so far as we know. Many countries distinguish between tax avoidance (legal) and tax evasion (illegal).
Israel is now proposing to abolish this distinction.
The proposed bill expressly targets tax avoidance (not just evasion) and would apparently put the burden of proof on any taxpayer who files the form to prove they didn’t gain a tax advantage.
Israel already has provisions requiring disclosure of specific tax planning techniques. There is also a general antiavoidance rule that allow the Israeli Tax Authority (ITA) to ignore artificial or fictitious transactions and acts (ITO Section 86). This section puts the burden of proof on the ITA and the ITA has won many court cases using Section 86. Other countries have similar rules.
We believe Section 86 is enough to maintain a reasonable deterrent against aggressive tax planning.
The “tax advantage” criteria are extremely broad. Most accountants provide year-end tax planning tips to their clients.
A good number of accountants and lawyers also provide ongoing support in a variety of business and tax matters. Apparently all this will have to be disclosed on the new form and the ITA is likely to be flooded with forms.
Inexplicably, the proposed bill expressly targets the use of tax reliefs (i.e. tax breaks). Israeli tax law contains many tax reliefs which serve as fiscal incentives for things the State of Israel wants to encourage, such as: preferred enterprises in industry, technology and agriculture, pensions, tax treaties, stock options for employees and the ten year Israeli tax holiday for immigrants and returning residents.
The bill seems to be hastily drafted. Tax is apparently not defined. Does it include foreign tax? Israelis operating or investing abroad who incur foreign taxes invariably need advice on when foreign taxes arise, the interaction between foreign and Israeli taxes, the use of Israel’s tax treaties, withholding taxes and VAT abroad, taxes on employees and how to avoid multiple taxation. Such advice would apparently become reportable.
Foreign corporations and individuals investing in Israel cannot do so blindly. They need advice on their liability to Israeli taxation, the interaction between foreign and Israeli taxes, the use of Israel’s tax treaties, Israeli withholding taxes and VAT, Israeli taxes on employees and how to avoid multiple taxation.
Such advice would apparently become be reportable. So would advice on Israel’s exemption from capital gains tax for foreign investors in Israeli securities.
This has retroactive effect for any advice already given any time in the past regarding the 2015 tax year onwards. Retroactive legislation without warning is generally frowned upon in Israel, unless there is an economic emergency – this is not the case at present.So what do we suggest?
How can aggressive tax planning, only, be identified and targeted? One possibility would be to require disclosure of tax advice billed on a success fee basis – a percentage of tax saved.
This would be fairer and easier to apply.
To sum up
The proposed measures are half-baked, bad for the Israeli economy and should be reconsidered. They break accepted international tax principles and would penalize taxpayers for taking normal advice. It remains to be seen what is finally enacted.
As always, consult experienced tax advisers in each country at an early stage in specific cases (at least for now).
firstname.lastname@example.org The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd