Bar-On seeks repeal of inflation-era law

The law applies a supplementary set of inflationary adjustments to the normal taxable profit computed according to regular historic cost principles.

By MATTHEW KRIEGER
September 24, 2007 08:09
3 minute read.
Bar-On seeks repeal of inflation-era law

bar-on 298.88 AJ. (photo credit: Ariel Jerozolimski)

 
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Businesses tangled in a mess of bureaucratic red-tape may get a bit of relief soon as Finance Minister Ronnie Bar-On intends to present to the government a plan to repeal the 1985 Adjustment for Inflation Law, legislation that was passed when the country was suffering from 1,000 percent inflation. "The removal of this law signals that the Israeli economy continues to strengthen and advances the economic policy of the country and will encourage more growth" said Bar-On, calling the law a vestment to Israel's troubled economic past, "The abandonment of this law is a sort of diploma - showing that the Israeli economy has progressed to the point where it no longer needs this legislation and it is an important step in Israel's becoming totally accepted as a 'developed' nation." Taxation under the Income Tax Law (Adjustment for Inflation)-1985 was introduced by the government at a time when Israel was suffering from a daily 2% rise in inflation and was designed to neutralize the erosion of capital investments in businesses and to prevent tax benefits resulting from the deduction of inflationary financial expenses. The law applies a supplementary set of inflationary adjustments to the normal taxable profit computed according to regular historic cost principles. The law introduced a special tax adjustment for the preservation of equity based on changes in the Israeli CPI (consumer price index) under which certain corporate assets are classified broadly into fixed (inflation resistant) assets and non-fixed assets. "We have been waiting a long time for the removal of this law," Leon Harris, an International Tax Partner at Ernst & Young Israel, told The Jerusalem Post. "This law was created when there was a great need for it here and now it has outlived its usefulness. Removing it will be an excellent thing - it will take away a lot of administrative and bureaucratic work and number crunching that needs to be done every month because of the law." According to the law, when shareholders' equity exceeds the depreciated cost of fixed assets, a tax deduction, which takes into account the effect of inflationary change on such excess, is allowed (up to a ceiling of 70% of taxable income for companies in any single tax year, with the unused portion permitted to be carried forward on a linked basis with no ceiling). If the depreciated cost of fixed assets exceeds shareholders' equity, then such excess multiplied by the annual inflation charge is added to taxable income. Additionally, subject to certain limitations, depreciations on fixed assets and losses carried forward are adjusted for inflation based on changes in the Israeli CPI. "Each month all of this information needed to be calculated and adjusted - getting rid of the law means less forms to fill out and less bureaucratic tie-ups," said Harris. While the law will be good for businesses, it will not, however, affect the individual taxpayer, explained Harris. Meanwhile, it was reported Sunday that Finance Ministry director general Yarom Ariav is formulating more tax reforms that will come into effect in 2010, including cuts in income tax, National Insurance levies, and the health tax to a maximum marginal rate of 40% and a reduction in the companies tax to 20%. The tax cuts will total about NIS 10 billion. The Ministry did not return calls looking to confirm the Globes report. Commenting on the removal of the Inflation Adjustment law, Ariav said "this law doesn't make sense to have now - it was written when we were in poor economic conditions, but that is not the situation now. If this law is repealed, it would mean a big step in making this economy even stronger." The decision was made with the support of Bank of Israel Governor Stanley Fischer, the Treasury said. The proposal to remove the law will be presented to the cabinet for approval within the next few weeks, and then sent to the Knesset for final approval.

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