Your Taxes: Keeping up with the budget bill

In view of the far-reaching potential effect of the budget bill on many people, we are tracking its progress.

By LEON HARRIS
June 18, 2013 22:59
3 minute read.
An accountant [illustrative photo]

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

The government sent its budget bill to the Knesset for debate and enactment on June 17. It is formally known as the Draft Law for Changes in National Priorities (Legislative Amendments for Achieving Budget Objectives in the Years 2013 & 2014) – 2013.

The intended commencement date for most clauses is August 1, 2013. That doesn’t leave very long for advance planning, which often may be worthwhile.

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In view of the far-reaching potential effect of the bill on many people, we are tracking its progress. We have commented before on some proposals, but they are still evolving. It remains to be seen what will be finally enacted and when.

The background to it all is the government’s deficit in 2012 of 4.2 percent of GDP instead of the 2.2% originally planned. The commentary to the bill blames this gap on a revenue shortfall.

Therefore, the aims of the bill are: to raise revenues, enhance tax enforcement using physical and technology means, and reform of the overly complex pension tax regime.

As for olim and senior returnees (lived abroad more than 10 years), they will continue to enjoy a 10-year Israeli tax exemption for overseas income and gains under the proposals. But it is also proposed to make them start disclosing the exempt income and gains on annual tax returns.

However, this disclosure requirement would only apply to olim and senior returnees who commence Israeli residency on or after August 1, 2013. So potential olim and returnees have a small incentive to get their skates on and take up Israeli residency by July 31. The prize is spending less time filling out tax returns.

With regard to dividends from foreign-resident companies, olim and returnees will only be exempt under the proposals if the dividend is paid out of foreign-source profits. This would put paid to doing business in Israel via a US LLC or S Corporation, for example.

With regard to trusts, it is still proposed to tax all trusts with an Israeli resident beneficiary, even if the settlor (grantor) is a foreign resident, However, it seems that only income paid or allocated to Israeli residents will be taxed, at a rate of 25% or 30%.

What happens if there are Israeli and foreign-resident beneficiaries? We are left to assume that income paid or allocated to foreign-resident beneficiaries won’t be taxed in Israel, but this is NOT expressly stated. The Israel Tax Authority should have the courage to clarify this. But it is clear that trusts will be taxed if they are settled by professionals and others who are unrelated to the beneficiaries.

With regard to privately owned “foreign professional companies,” Israel has long tried to tax them. However, this is forbidden under most of Israel’s tax treaties unless the foreign company has a “permanent establishment” (fixed place of business) in Israel. Israeli exporters with a US marketing subsidiary were shielded from Israeli tax by the US-Israel tax treaty.

It is proposed to impose 26.5% company tax AND 30% income tax on the Israeli shareholders on deemed dividends, even if the shareholders are individuals and not companies.

Unfortunately, imposing company tax on individual shareholders seems likely to contravene Israel’s tax treaties just like before.

It is doubtful if the Tax Authority ever tried to calculate Israeli tax under the proposals; our spreadsheet had several loose ends, not to mention duplicate foreign tax credits. So exporters and others with foreign service companies, prepare to laugh and cry.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co
Leon  Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.


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