The end of the tax year, December 31, is nigh. Are you in good shape tax-wise?
Here are a few examples of the many things that businesses may want to review
with their advisers in Israel and any other country where they have a
Beat the proposed tax rises
A Knesset bill proposes to raise
tax rates from January 1, 2013. This is to pay for reforms intended to answer
the demands for social justice by tent demonstrators this summer and the
recommendations of the Trajtenberg Committee.
What are the main
proposals? For companies, it is proposed to increase the regular rate of company
tax from the current 24 percent to 25% in 2012.
For individuals, a new
higher tax bracket of 48% is proposed for business and employment income above
NIS 40,000 per month, or approximately NIS 480,000 per year in
Currently personal income-tax rates range up to 45%. For business
and employment income above NIS 1 million per year, an additional 2% special
surcharge is proposed, making the proposed top rate 50% for
The tax on dividends, capital gains and land appreciation
will go up 5% under the proposals.
The regular rate will increase from
20% to 25%. The rate for major shareholders (holding 10% or more) will increase
from 25% to 30%.
Therefore, consider accelerating bonuses, dividends,
interest payments and capital gains into 2011, where possible, if you don’t mind
paying the resulting reduced tax sooner.
It is true that a decrease is
proposed in 2012 in National Insurance Institute upper-income limits from nine
times the national average wage to five times (about NIS 40,000) in
But if you own a company and need cash soon, taking a dividend in
2011 may still save you more than a salary bonus in 2011 or
Businesses may also want to consider whether expenses or losses can
be postponed until 2012 if they may be used to save tax at the higher proposed
rates then. But if that means showing higher profits this year, the resulting
tax this year needs paying shortly.Transfer pricing
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. The tax regulations require taxpayers to sign an express
declaration to this effect on Tax Form 1385 and attach it to 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.
practice, this can be a great opportunity, not only an obligation. If in doubt,
consider requesting an “advance pricing agreement” from the Israel Tax
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.
minimum rate of interest for Israeli tax purposes is generally 3.3% on loans
granted in the period October 1, 2009, to December 1, 2011, rising after then to
There are a number of exceptions for back-toback loans,
foreign-currency loans and backto- back foreign-currency loans.Inventory
If your business has inventory (stock), yearend 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 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 year-end
When do you count the inventory? On December 31 (a Saturday
this year), 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 Israel Tax Authority before the yearend 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.
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; i.e., 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
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
We already mentioned the tax-rate
increases proposed for 2012. Timing can be important for many other things in
Israel as well. These include: • paying National Insurance Institute
contributions on non-salary income as 52% is deductible as an expense, when
paid, for income-tax purposes; • charitable contributions in order to get a tax
credit equaling the company tax rate (24% in 2011) on donations totaling NIS 400
to NIS 4,208,000 in 2011, but not more than 30% of taxable income; • prepaid
rental income is taxed upon receipt; • 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; • achieving exports of 25% of sales for a “preferred enterprise”
(mifal muadaf) in industry or technology in order to enjoy tax breaks for
profits and dividends under the Law for the Encouragement of Capital
Investments; • increasing foreign investment this year in companies owning an
approved tourism enterprise or an approved property, to help achieve a bigger
tax break next year; • a “privileged enterprise” (mifal mootav) wishing to elect
2010 as its “election year” to initiate tax breaks under older provisions in the
Law for the Encouragement of Capital Investments must do so in their 2010 tax
return or by the end of 2011, whichever is earlier.
In our next column,
we will discuss year-end tax planning for individuals because there is a myriad
of additional things to consider.As always, consult experienced tax
advisers in each country at an early stage in specific
Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.