(photo credit: REUTERS)
The Israeli general election is over, the coalition-building process has begun. Tax was not exactly the top issue. The Likud Party election manifesto called for tax and VAT reductions over the longterm without saying how. The Blue and White Party manifesto proposes to encourage long-term investment by expanding benefits. Tax is scarcely mentioned.
The US GILTI issue
So what should be on the tax agenda of the next government? We comment below on two potentially major issues: the US GILTI tax and the lack of tax tribunals in Israel.
The Law For the Encouragement of Capital Investments, 1959, has helped fuel the Israeli hi-tech sector with tax breaks. If an Israeli hi-tech company saves, say, $1 million in tax, its value may go up by around $15m. due to higher post-tax profitability. This law has helped attract billions of dollars of US investment into the Start-Up Nation over the years.
However, there is a new American tax called GILTI (Global Intangible Low-Taxed Income) which makes US investors pay more US tax because of the tax breaks in Israel (or anywhere offshore).
What is needed? Israel should ask the US administration directly and via the OECD to make an exception to GILTI based on the nexus principle – no immediate US tax if there are engineers and other skilled personnel in an Israeli enterprise. This would fit in with the OECD’s recommendations on BEPS – Base Erosion and Profit Shifting – which aim to penalize low-substance offshore planning but not genuine onshore activities.
To sum up, Israel needs to deflect GILTI from its hi-tech and industrial sector.
Lack of tax tribunals in Israel
This is not a technical issue. Businesses and accountants in Israel are experiencing increasingly aggressive conduct on the part of the Israel Tax Authority. Taxes must be reported and paid on time by the middle of every month, and taxpayers must respond to numerous ad hoc requests – often by post which is slow to arrive. The ITA often adopts an aggressive interpretation of the tax law e.g. Israeli fiscal residency after only 30-80 days’ presence in Israel. The online tax reporting system (Shaam) is a slow inefficient mixture of Windows and DOS (remember DOS?).
And the ITA deploys a range of punishments – fines with or without cause, bank-account freezes, bailiffs at your door, and more.
Appeals against a tax assessment are filed with a colleague of the tax official concerned, and if this is unsuccessful, to the District Court. That can take years and cost a lot. All this is bad for business, and unnecessary, even if Israelis don’t like paying tax.
What is needed? For some reason Israel lags behind other countries, as it lacks a tax tribunal system of redress for complaints about tax matters.
The US and Canada have a system of tax courts, the UK has a tax tribunal system.
Generally, the tax court/tribunal process deals with the bulk of tax disputes, thereby reducing the burden on the regular court system.
Typically, tax courts/tribunals are better because they are less formal than regular courts, they are much faster, and taxpayers generally don’t need to incur the cost of hiring lawyers. Taxpayers can go in themselves or send in their accountant. Moreover, these bodies are often perceived to be fairer as the judges typically have their own business and/or tax experience.
The Israeli District Courts have, in recent years, hired former tax lawyers as judges who are good on knotty points of law, but may not provide the best forum for complaints about heavy-handed bureaucracy of tax officials.
Furthermore, in the US and UK, cases before the tax court/tribunal systems are often determined or agreed without the need for a hearing, if the written complaint filed speaks for itself. All this is sorely lacking in Israel.
Moreover, the UK system includes a cute rule that Israel would do well to copy: a UK taxpayer can ask the UK HMRC (Her Majesty’s Revenue and Customs) to cancel tax owed if HMRC didn’t act on information which the taxpayer or his/her employer gave to the HMRC. A similar rule in Israel would surely keep the ITA on its toes.
To sum up, the next Israeli government should introduce a tax court/tribunal system to clean up the tax environment for businesses and other taxpayers at low cost. Israel would benefit greatly from this.
As always, consult experienced tax advisors in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. Leon@h2cat.com.
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