The corruption scandal at the Israel Tax Authority seems to have done little to derail confidence among foreign investors, who were expected to continue to invest strongly in Israel in 2007.
"I spoke with leading US investment banks and was told that they are not concerned by the scandal. They said that if the police can arrest the head of the Tax Authority, clearly Israel is a country that does not tolerate corruption," Zvi Chalamish, the Finance Ministry's chief fiscal officer for North America, told The Jerusalem Post.
Chalamish said the investigation into alleged improprieties at the Tax Authority was just the latest in a string of events that could have impacted foreign investment but had not.
"The positive response I received from foreign investors was in line with what we saw last year," said Chalamish. "Foreign investment in Israel hit a record during that time, nearly double 2005 despite the prime minister's sudden illness... Hamas's election win and the war in Lebanon."
Chalamish added that he expected 2007 to remain a strong year for foreign investment.
"I cannot say if this year will be a record year but from our previous experience and conversations with foreign investors to date, I do not see this affair affecting investment in Israel," he said.
Chalamish also said he did not believe the arrest earlier in the week of the ITA representative to the US, Yigal Sa'ar, would have an impact. Police, who did not elaborate on the allegations against Sa'ar, had summoned the New York-based ITA official back to Israel where he was immediately taken into custody. His detention followed the arrest of several leading ITA officials including Jacky Matza, the head of the authority.
Lawyers and accountants in Israel have expressed concern that the scandal could negatively impact mergers and acquisitions "which hit a record $12.4 billion in 2006 and accounted for about half of the foreign investment in the country" by slowing the process.
"I represent a lot of foreign companies and for them the assessment of the tax issue is the first step when considering business opportunities in the local market," said Harel Locker, a partner at the Israeli law firm of Shochat, Locker & Partner, which specializes in tax matters. "The law in Israel is not always clear and thus pre-rulings and similar tax arrangements are essential to interpret and clarify the law without having to go through lengthy legal procedures."
It has become standard practice in Israel since 2004 to obtain advance tax rulings before completing a big deal to secure tax consequences of a transaction.
The interim director of the Tax Authority, Yossi Bachar, this week tried to allay fears of a slowdown within the system.
"If decisions and rulings are not made out of fear and the tax system stopped working, the courts would become jammed and the entire system would come to a halt," Bachar told attendees at the annual conference of the Institute of Certified Public Accountants on Monday. "I will never be an expert on tax, what I am here for is to make sure that even in the short-term the system continues to work and this is what I am going to try to do."