(photo credit: Courtesy)
Earlier this year, the Israel Tax Authority issued a circular on the Israeli
legal and tax aspects regarding: “Prohibition on Payment of Bribes to Foreign
Public Employees” (Circular 2/2011, January 23, 2011). The following is an
overview of the circular.
Israel subscribed to the
United Nations Convention Against Corruption in February 2009. The following
month it subscribed to the OECD Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions.
The Israeli Penal Law was amended in 2008 by adding Section 291A, which
provides that the law on giving a bribe to a foreign public employee is the same
as giving a bribe to a local employee.
Consequently, it is illegal to
give a bribe to a foreign public employee, even if this is done indirectly via
an intermediary, or if the beneficiary is a third person.
This applies to
a bribe made to achieve, assure or promote business activity or an advantage
One of the underlying principles embedded in Israeli
case law is that the bribe can be for an act related to the function of a
foreign public employee, even if the employee isn’t authorized or entitled to do
so but carries out the function concerned.
A “foreign public employee” is
broadly defined to include employees of a foreign state, public office holders
and employees of international organizations, among others. A “foreign state”
includes any sovereign body in a foreign state, including federal, state or
local bodies and state bodies not belong to a state, such as the Palestinian
The maximum prison sentence is now seven years for
giving a bribe and 10 years for receiving one.Tax treatment of bribes
the Israeli tax side, Section 32(16) states that no expense deduction will be
allowed for “Payments, whether made in cash or in kind, where there is a
reasonable basis to assume that making them constitutes an offense under any
This section took effect in November 2009, but earlier court cases
in Israel had already reached a similar conclusion. The net effect of Section
32(16) of the Income Tax Ordinance plus Section 291A of the Penal Code is a
prohibition on deducting bribes to foreign public employees in international
As for transparency, unlike most other
countries, Israel has detailed bookkeeping regulations for tax and VAT purposes,
which businesses in Israel must comply with (Income Tax Ordinance Section 130).
Failure to keep compliant books, or the destruction or concealment of documents
relevant to a tax assessment, is punishable by a year in jail and/or a fine
(Income tax Ordinance section 216), as well as a “best judgment” estimated
assessment by an assessing officer, in lieu of the taxpayer’s
Tax officials are bound by a duty of confidentiality
under Sections 234 and 235 of the Income Tax Ordinance, unless the finance
minister allows otherwise. Nevertheless, the finance minister has delegated this
power to the director of the tax authority (decision of July 6, 2005, published
in the Notices Gazette number 5418). Consequently, the director of the tax
authority is allowed to transfer information to the Israel Police regarding
payments made by an Israeli resident to a foreign public employee that are
The circular (2/2011) goes on to instruct
Israeli tax officials to try to identify signs of fraud or corruption in their
tax audits. These signs include: fictitious employees, deficient books,
obstructive taxpayer behavior and invoices issued in tax-haven jurisdictions or
places where the payer has no activity.
Tax officials should check
whether relevant information is obtainable under information exchange articles in
Israel’s tax treaties. Simultaneous tax audits may be initiated in this way in
Israel and other treaty countries.
Evidence may be assembled by means of
analytical review of financial statements, checking books and records,
interviewing the taxpayer and other parties, and in-depth examination of
specific transactions. A company’s internal check procedures may also be
reviewed and so may excessive payments to external consultants.As
always, consult experienced professional advisors 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.