Your Taxes: Don’t stop your aliya!

The ITA is taking upon itself legislative, executive and judicial powers that in most countries might be considered unconstitutional.

May 28, 2013 22:32
4 minute read.
An accountant [illustrative photo]

An accountant calculator taxes 370. (photo credit: Ivan Alvarado / Reuters)

Reports have circulated over the past week that the tax breaks for olim are about to end. The result has ranged from confusion to outright anger. Is the Israeli government going back on its word? Don’t they want an ingathering of the exiles? Many immigrants are rich and/or smart and have much to contribute to Israel.

So what is really going on? In short, poor communication and a little shortsightedness. It all revolves around the government’s budget that is intended to plug a NIS 40 billion deficit, which suddenly mattered after the last election.

First we had a set of Treasury resolutions, and now we have a draft bill that will soon go to the Knesset for debate.

It remains to be seen what will be enacted. It is sure to be a bumpy ride.

The 10-year tax holiday

Currently, under today’s law, new residents and “senior returning residents” (who lived abroad 10 years) currently enjoy a 10-year exemption from Israeli tax on overseas income and gains (“tax holiday”). They are also exempt from reporting such overseas income and gains as well as overseas assets. After all, why report them if they are exempt from Israeli tax? Under the budget proposals, the tax exemption would NOT be impacted, but the reporting exemption would be repealed. In other words, olim will continue to pay zero tax on overseas income and gains, but they will have to start disclosing them on annual tax returns.

This sudden attack of bureaucracy is being blamed on pressure from the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes. It seems Israel might be asked to transfer details of overseas income to other countries. Israel joined the OECD in 2010.

However, the OECD model tax treaty and supporting commentary says that countries “are not at liberty to engage in ‘fishing expeditions’ or to request information from another country that is unlikely to be relevant to the tax affairs of a given taxpayer” (commentary on model treaty Article 26). Therefore, information requests are few and far between, as they must relate to specific serious cases already under investigation.

Furthermore, the process of uprooting and migrating to Israel is not easy. There is no point in making olim fill out tax returns for no reason.

In reality Israel ought to be able to put off such pressure.

Within the EU there is freedom of movement.

And when UK residents migrate to the US, does the IRS report each person’s worldwide income to the UK HMRC? (Don’t bother checking).

Trust proposals

The Israeli budget proposals also make dramatic changes to the trust tax regime. According to reports, certain persons have used overseas professional people to settle a trust for their benefit. So the budget proposals aim to tax trusts where the beneficiary has no family relationship to the settlor.

This is unfortunate because it is not uncommon to benefit unrelated friends; for example, if a rich elderly person has no children, or family members died due to hostile action.

And what about charitable trusts? The (ITA) has consistently failed to offer any clarification on their tax treatment despite many requests over the years.

If the Bill and Melinda Gates Foundation makes an award to an unrelated Israeli resident, will the foundation be swept into the Israeli tax net under the proposals? The budget proposals go further by proposing to tax almost every trust with an Israeli resident. Fortunately, this should not apply during the 10-year tax holiday of the beneficiary if that person is an oleh.

Does all this matter? According to Bank of Israel statistics, more than $3 billion flows to individuals in Israel from abroad every year. Many transfers are gifts, but some of the larger amounts are thought to be via trusts.

The great dictator If you take a position that differs from a published instruction of the ITA regarding the interpretation and implementation of the tax law, you must say so on a form according to the proposals. Otherwise, you could be liable to a fine of 30 percent of the tax deficiency. There is no mention of judicial or other review. This means the ITA is taking upon itself legislative, executive and judicial powers.

In most countries this might be considered unconstitutional.

To sum up The 10-year tax exemption for overseas income of olim is not under fire, but the reporting exemption is in danger of repeal under the budget proposals. Don’t stop your aliya.

As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.

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