Your Taxes: More bureaucracy for business

In 2010, Israel began a major reform of VAT procedures that continues this year.

By LEON HARRIS
Your Taxes_311 (photo credit: Thinkstock/Imagebank)
Your Taxes_311
(photo credit: Thinkstock/Imagebank)
It is rumored that the Greek Tax Authority gets such sparse information from its taxpayers that it hires aircraft to photograph swimming pools in people’s yards and then checks if their reported income reflects such affluence.
Meanwhile, on this side of the Mediterranean, there are enough tax-reporting requirements to keep an army of accountants and bookkeepers fully employed. And to help celebrate the new year, yet more Israeli tax-reporting requirements are on the way in 2012. These relate to: (1) online VAT returns, and (2) employer’s tax returns.
Online VAT returns by businesses
In 2010, Israel began a major reform of VAT procedures that continues this year. The aim is to curtail VAT fraud involving fictitious tax invoices. This is done by requiring detailed online VAT returns that specify every sale and every item of expenditure, as well as the name and identity number of every customer and supplier concerned. In practice this involves using special accounting software and an official encrypted smart card.
Since this is a big administrative burden for small- and medium-sized businesses, the reform was phased in and applied initially to larger businesses. In 2011, businesses had to file detailed online VAT returns if their 2010 revenues were over NIS 4 million in 2010 or if they had to keep double-entry books (with debits and credits) under the tax regulations (see below).
The intention was to apply the online VAT rules to all businesses by 2012. However, this past December saw a heated debate between the Israel Tax Authority (ITA) and the Knesset Finance Committee. Finally, white smoke emerged between the two. On December 26 the ITA announced that in 2012 detailed online VAT returns are required from businesses if their 2011 revenues were over NIS 2.5m. or if they have to keep double-entry books under the tax regulations. Many businesses with lower revenues received letters from the ITA instructing them to start filing detailed online VAT returns in 2012. Those letters are now superseded by the December 26 announcement.
The double-entry requirement varies according to sector. The tax regulations may not require double-entry bookkeeping in instances such as these: manufacturers and wholesalers with annual revenues (in the preceding year) below NIS 9.2m.; retailers with annual revenues below NIS 3.45m. or with less than seven employees; builders with annual revenues under NIS 3.45m.; land dealers with annual revenues below NIS 10.35m.; real-estate agents with annual commission below NIS 560,000; certain other service providers with annual revenues below NIS 1.95m.
Online VAT returns by charities and financial institutions
Surprisingly, financial institutions and charities in Israel are also potentially required to file online returns of their transactions. According to another announcement from the ITA dated December 29, 2011, the Knesset Finance Committee approved the previous day the following rules: Detailed reporting is required in 2012 by charities with revenues exceeding NIS 20m. in 2010. If the charity had to file detailed returns in 2011 (because they had over 300 employees) but had revenues under NIS 20m. in 2010, it can stop filing detailed online returns in 2012.
Financial institutions are liable to file detailed online reports in 2012 if their revenues in 2010 exceeded in NIS 4m. A similar rule applied to them in 2011.
Charities and financial institutions filing detailed online returns for the first time in 2012 can file the January and February returns by the deadline for the March return: by April 15, 2012. They should get a letter from the ITA informing them of their new reporting obligation, but they must report anyway, even if they do not receive such a letter, according to the announcement.
Employers’ reports
Until now, employers have filed annual returns summarizing tax withheld each month from employees and suppliers on Forms 126 and 856. Commencing in 2012, such summary returns will apparently be required every four months. The Israeli Certified Public Accountancy Institute has called for a two-year postponement of the new requirement due to the lengthy time needed to prepare such returns. The Institute questions whether four monthly returns will add anything to the annual returns.
Concluding remark
The Israeli economy is in better shape than many others and taxes are collected. Additional bureaucratic requirements hardly seem necessary.
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.