The Israel Tax Authority (ITA) has published more reportable tax positions, which are similar to reportable tax shelters in the US and UK. However, the ITA also uses them to impose its interpretation of the tax law in non-tax shelter cases. The ITA claims this is okay because the Knesset allowed them to issue 400 such positions, and “only” 101 positions currently exist.
The latest batch relates to the 2021 tax year onwards and take aim at international cases and trusts.
What are reportable tax positions?
A reportable income tax position is a position contrary to a position published by the ITA if the tax advantage exceeds NIS 5 million in the tax year or NIS 10m. over four years.
No reporting is needed from certain Israeli charities, nor from individuals or companies with income below NIS 3m. or capital gains below NIS 1.5m. in the tax year.
Reportable income tax positions must be reported within 60 days after filing the main annual income tax return.
If your tax planning is at odds with an ITA position, you must tell them on Form 146 so they know where to start a tax audit. If you don’t manage to reach agreement with the ITA regarding such a position, you decide whether to accept theirs or go to court.
Below we overview some 2021 positions.
The ITA says that a virtual currency (e.g. bitcoins) is a taxable asset but not a currency or foreign currency. Therefore, an exemption in Israeli law for certain forex differences does not apply.
If an Israeli employee receives options/shares of a foreign parent company, it is customary for the parent company to recharge a paper cost to the Israeli subsidiary. The ITA says this should only be done upon vesting at fair value pursuant to an agreement and included in the Israeli subsidiaries cost base if “cost plus” is applied. Otherwise, any payment by the subsidiary to the parent may be subject to withholding tax as a dividend.
Foreign tax credits
No foreign tax credit will be allowed for foreign sales tax, Goods & service tax (= VAT in some countries), equalization tax (e.g. in India) or health tax (e.g. Obamacare). Also, none for corporate income tax booked under the equity method of accounting from a different company.
Controlled foreign company (CFC)
Deemed dividends from passive CFCs may be taxed under Israeli tax rules if the CFC is not a taxpayer in its country of residence (e.g. US LLC?) or pays over 15% tax but is part of a chain of companies paying under 15%.
Israeli resident beneficiary trust
Such a trust has a foreign resident settlor and at least one Israeli resident beneficiary. In general, it may not claim a cost step-up (revaluation) of an asset contributed to it unless: 1) the trust voluntarily paid 4%-10% tax on its assets under a (now expired) “transitional” amnesty program of March 9, 2014, or 2) if the settlor and beneficiary are relatives (as defined, a “relatives’ trust”), the trust was formed before 2003 and the contribution to the trust was reported on Tax Form 147 by the end 2015. The latter is said to be based on Section 75G1(f) of the Tax Ordinance and paragraph 18.104.22.168 of Tax Circular 3/2016, but the 2003/2015 time limits seem to be new.
A trust with an Israeli resident settlor or beneficiary will often be a fully taxable Israeli residents’ trust even if some of the beneficiaries are resident in another country, which might also tax trust income. So, it may seem tempting to carve up trust assets or trust income between Israeli residents and foreign residents to help avoid double taxation. But the ITA reportable position says a carve-up is a capital gains tax event, and if unreported, the entire trust remains taxable in Israel even if some beneficiaries are in their 10 year tax holiday for foreign income.
The tax ordinance requires reportable positions to be written in clear and understandable language and published after giving the CPA Institute and Law Society a reasonable opportunity to comment. In practice, most positions are written in long-winded sentences, and then circulated and published in a hurry at year-end. This time, the professional bodies complained bitterly and the ITA reportedly promised to mend its ways in future by pruning the number of reportable positions, simplifying them, circulating a draft version by June 30 and publishing the final version by September 30. Comment: We hope so.
As always, consult experienced tax advisers in each country at an early stage in specific cases. [email protected] The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.