Those that look ahead, get ahead. Business profits and taxes need to be monitored regularly, especially toward the tax year-end of December 31. Below is a starter list of planning tips to check out.
On the business side: First, a mini business plan.
What are your goals and are you achieving them? What is your competitive advantage? What is your strategy for expanding sales revenues – find new customers gradually or buy a business? Are you networking sufficiently? What is your exit strategy and when do you want to implement it? Do you check your bank balance(s) and cash flow every morning? Second, your present situation.
What is your gross profit rate? Can it be improved? What is your likely net after all expenses profit this year? What is your likely tax bill this year? Were sufficient tax installments paid? Third, year-end planning.
The company tax rate for profits is scheduled to decrease from 26.5 percent in 2015 to 25% commencing January 1, 2016 according to a bill expected to be enacted by the Knesset.
No change is expected for self employed (unincorporated businesses) who face income tax and National Insurance bills that range from almost nothing to 50% on annual income exceeding NIS 810,720 in 2015. Given all this, consider the following among others: income and income timing; expenses and expense timing; inventory count and levels; Are other accruals or provisions appropriate? Is long term project planning possible? What about charitable donations as these may confer tax breaks? Fourth, are your pension, study funds (hishtalmut) and life insurance enough? The pension taxation rules have gotten incredibly complicated and a reform is expected in 2016. In the meantime, here are a few highlights.
Employees, including directors and working shareholders, are supposed to have pension plans. The mandatory minimum pension plan contributions total 17.5% of gross salary up to certain limits. Of this, the employer pays 6% towards retirement pension and 6% on account of severance pay, while the company pays 5.5% towards retirement pension.
Other pension plans exist, typically “managers insurance” where contributions may total 18.33% on different terms. For the self-employed and self-funders, the rules are very detailed and may on occasion include 7%-11% contributions deductible from annual income of up to NIS 208,000- NIS 417,600 (in 2015) and a 5% tax credit within various limits. Always consult a pensions specialist about monthly contributions to such funds and annual top-ups.
Fifth, as for study funds, these are tax deductible or exempt if maintained for at least six years. They are not mandatory. Employers pay 7.5% and employees 2.5% of gross pay of up to NIS 15,712 per month. Self-employed business people can contribute 7% of annual profits of up to NIS 263,000 per year (in 2015) and enjoy a 4.5% deduction from annual income. Again, consult a specialist on all this.
Sixth, do you optimize the aliya 10-year exemption for foreign income, if relevant? Many don’t.
Seventh, will other moderate tax planning save you money? Are you an exporting producer? If so, do you qualify for preferred enterprise tax breaks (9%-16% company tax and 20% dividend withholding tax)? Do you have and optimize intellectual property (IP)? Has the transfer pricing between your entities been reviewed and optimized? Have you considered the latest recommendations of the OECD regarding “base erosion profit shifting” (BEPS)? For example, if you use overseas agents, is it necessary to change this? Eighth, is it time to incorporate? Are profits increasing or do you need legal protection? Is there spare cash? Consider bonus, profit distribution, pension contributions, study fund contributions. Also consider investment in equipment, new car, real estate, marketing, etc.
Ninth, are you managing your business well? Are your accounting books up to date and helping you manage the business? Is your tax, value- added tax and National Insurance reporting up to date? If not, there are penalties and the Tax Authority can even stop you doing business with governmental entities and public corporations.
Are all employee matters up to date? (Employment agreements or notices, mandatory pensions, mandatory recreation – havraah – payments, mandatory vacation allowances and payroll tracking, sick leave payroll tracking, etc.) On the family and personal side: First, before you reach 120, do you and your spouse have up to date wills in each relevant country? If not, consult your lawyer immediately.
Second, before others reach 120, are you expecting an inheritance from abroad? If so, you should plan against double tax – inheritance/estate tax abroad and capital gains tax in Israel upon a subsequent sale.
Third, personal investments: Consult a qualified investment adviser periodically (regarding diversification, etc); check foreign taxes, and any Israeli foreign tax credit or aliya exemption? Check if Israeli tax is withheld at source and whether annual tax returns are needed or not; have you filed Israeli half yearly capital gains tax reports regarding foreign securities sold? Fourth, aliya tax breaks. Are you a new or senior returning resident who lived abroad 10 years? If so, do you optimize the aliya 10 year exemption for foreign income and gains? Fifth, trust(s). Have you checked out the new Israeli tax regime that commenced on January 1, 2014, and taken appropriate action – both transactional and accounting? In the case of Relatives’ Trusts with a foreign living settlor, notification must be filed with the Israeli Tax Authority by December 31, 2015. And the desired tax treatment (25% tax annually or 30% tax on distributions) must be elected by then too – have you considered this? If the settlor is deceased and a beneficiary resides in Israel, the tax is always annual.
Double tax exposure is quite possible if assets were acquired before the end of 2013 or if a beneficiary resides abroad, but a “step-up election” is possible on a reduced-tax basis – consult an experienced adviser if you didn’t already do so.
Sixth, retirement planning.
Are your pension, study funds (hishtalmut) and life insurance enough? See above.
Seventh, Israeli real estate briefly: Israeli home rental income over NIS 5,070 per month (in 2015) is taxable. Do you want to elect and pay 10% tax of the gross rent by January 30, after the year-end or pay regular Israeli taxes of 30%- 50% on rents minus expenses and depreciation? There are at least three ways of calculating depreciation.
Eighth, charitable donations this year to approved Israeli charities in the year may qualify for a 35% tax credit, within certain limits. For example, if you donate NIS 1,000, you may get a NIS 350 reduction in your Israeli tax bill.
Ninth, are there any tax skeletons in the closet? Financial institutions around the world are being forced to sign up overseas clients (and new olim in Israel) on “self-certification” forms saying that tax has been paid on in the country of residence, or else deny them service. In addition, the financial institutions will soon be reporting income and other details to the account holders’ assumed country(ies) of residence. How soon? For US persons and non-US investors in the US, reporting under “FATCA” (Foreign Account Tax Compliance Act) was scheduled to begin in September 2015 regarding 2014, but this has been temporarily postponed.
For most other people, a parallel “Common Reporting System” is being introduced by the OECD in two main waves.
The first wave of countries, where banks will start reporting in 2017 regarding accounts held with them in 2016, includes: Argentina, Belgium, British Virgin Islands, Cayman, Curacao, Cyprus, France, Germany, Gibraltar, Ireland, India, Isle of Man, Italy, Lichtenstein, Luxembourg, Malta, Mauritius, Mexico, Netherlands, Seychelles, South Africa, Spain, Sweden, Turks and Caicos, the UK and Uruguay.
The second wave of countries, where banks will start reporting in 2018 regarding accounts held with them in 2017, includes: Israel, Austria, the Bahamas, Brazil, Canada, Hong Kong, Monaco, Singapore and Switzerland.
Anyone caught in the first wave may want to take action before the end of 2015 (close the account?) or by June 30, 2016, (Israeli amnesty on an anonymous basis initially) or by the end of 2016 (no anonymity).
These things take time, start now if you need to.
The above is just a general overview of things to check out for starters.
As always, consult experienced tax advisers in each country at an early stage in specific firstname.lastname@example.org The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.