Your Taxes: Year-end tax planning tips

Here are a few examples of the many things that businesses may want to review with their advisers.

By LEON HARRIS
The end of the tax year, that is December 31, is nigh. Are you in good shape tax-wise? Here are a few examples of the many things that businesses may be worth reviewing with their advisers in Israel and any other country where they have a connection.
Exploit the tax rate reductions The regular rates of company tax are set to decrease from 25 percent in 2009 in 2010, to 24% in 2011, 23% in 2012, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% from 2016.
Therefore, companies may want to consider whether income can be deferred legitimately to a later year and whether expenses or losses can be accelerated to an earlier year (e.g., by selling slow-moving inventory at bargain loss-making prices before the end of the year). This is also pertinent to capital gains from most assets in Israel and abroad.
Transfer pricing
Check your international transactions with related parties (50% ownership link among other things) are on arm’s-length market terms before you close your books and theirs for the year. New regulations require taxpayers to sign an express declaration to this effect on their annual tax returns. They must also be able to produce a “transfer pricing study” in this regard within 60 days after any demand from the Israel Tax Authority. In practice, this can be a great opportunity, not only an obligation. If in doubt, consider requesting an “advance pricing agreement” from the Israel Tax Authority.
Intercompany loans
Consider charging interest. Under special rules, the lender is taxed on the interest he is deemed to have undercharged, but the borrower can’t deduct interest he didn’t pay.
The prescribed minimum rate of interest for Israeli tax purposes on loans granted on or after October 1, 2009, is 3.3% per year (unlinked to the rate of inflation). There are a number of exceptions for back-to-back loans, foreign-currency loans and back-toback foreign-currency loans.
For loans given before October 1, 2009, various transitional rules apply. If the lender was subject to the main anti-inflation tax regime that existed until the end of 2007, the prescribed interest rate for pre-October 2009 loans is the rate of inflation according to the Israeli consumer price index (CPI) until repayment of the loan or the end of 2010, whichever is earlier (even if the loan was given after 2007). Exceptions apply to other lenders and to back-to-back dollar loans.
Inventory (stock) count
If your business has inventory (stock) year-end value impacts on the profit you report this year. The tax regulations require all tangible inventory to be counted if it is held for sale in the ordinary course of business, or is in production ahead of such a sale, or will be needed in order to supply goods or services for sale.
You have to count not only goods you own, but also other goods you hold for others, e.g. on consignment (becomes yours when you sell it) or already sold to the customer. Obviously, if the goods are not yours on December 31, you count them but don’t include them in your your year-end inventory.
When do you count the inventory? On December 31, or any date between December 21 and January 10 if you make appropriate adjustments to arrive at the year-end inventory, or some other date if you notify the Israeli Tax Authority before the year-end and have a detailed inventory recording system.
At the time of the count quantities matter and the shekel values can be added later.
At the inventory count, the sheets on which you record the quantities must be consecutively numbered and dated, state the location and describe the goods in a way that identifies them. State the quantities you are counting – units, kilograms, etc. Note separately obsolescent, slow-moving and defective inventory. Each count sheet must be signed by the counters and their name(s) must be stated. When you come to value the inventory, apply the lower of cost or market value, on a specific basis or FIFO (first in first out), never LIFO (last in first out).
Long term projects – go slow?
Detailed rules apply to those that carry out long-term work projects lasting over a year – mainly builders. If the builder is a contractor who does not own the building, income must be reported this year if the work is 25% complete this year. If the builder is a developer who owns the building, reporting is needed when the building is fit for use.
Detailed rules govern the above as well as expenses, finance expenses and losses. A detailed review is obviously necessary ahead of the year-end.
Get your timing right
Timing can be important for many things in Israel, including: paying national insurance contributions on non-salary income as 52% is deductible as an expense when paid for income tax purposes ; prepaid rental income; replacement of depreciable fixed assets to get a tax deferral or loss deduction; offsetting loan interest expense against dividends (e.g., Paz Gaz and Pi Glilot cases); taxpayers with low-taxed controlled foreign companies; taxpayers intending to claim foreign tax credits; businesses allowed to report income on a cash basis; companies required to withhold tax from payments in Israel or abroad in order to deduct the payment as an expense; payments to 10% shareholders; payments to provident/pension funds; payment of tax installments including those for nondeductible expenses; bonus payments; filing lawsuits for bad debts where appropriate; investing in fixed assets within two to three tax years to claim tax exemptions or tax breaks applicable to a privileged enterprise (industrial, tech or tourism) or waiting till 2011 to claim lower tax rates proposed (but not yet enacted); increasing foreign investment this year in companies owning a privileged enterprise or approved enterprise or an approved property, to help achieve a bigger tax break next year.
In our next column, we will discuss yearend tax planning for individuals - there is a myriad of things to consider.
If you want more detailed info or to ask questions regarding year-end tax planning, please come to our educational seminars on December 22 and 28 at 7pm on both dates at 128 Ahuza Street, Raanana. There is no charge and no other obligation. Please register at the email below or by phone: 09- 7730255 as places are limited.
As always, consult experienced tax advisors 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.