Israel's banks are easing up - here's what that means - opinion

Israeli banks and other financial institutions are about to scale back their own confirmations for tax purposes of investment income.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)

Israeli banks zealously seek confirmations from customers and their accountants that international money transfers meet tax and anti-money laundering rules in each country involved.

So it is strange to discover that Israeli banks and other financial institutions are about to scale back their own confirmations for tax purposes of investment income (interest, dividends and capital gains) and tax withheld on Forms 867 for 2021.

This is according to a frantic warning published by the Institute of Certified Public Accountants (CPAs) in Israel on March 27. Form 867 confirmations have to be attached to nearly every tax return filed in Israel. The change is relevant to companies, not individuals apparently. It means more work for companies, large and small.

What is happening?

According to the CPA Institute, confirmations issued by banks, insurance companies and stock exchange members to corporate clients will be different for 2021. This is a unilateral change forced on companies without advance consultation, according to the CPA Institute.

Illustrative photo of Israeli money (credit: MARC ISRAEL SELLEM)Illustrative photo of Israeli money (credit: MARC ISRAEL SELLEM)

Information about gains or losses in securities will apparently no longer be stated on Form 867.

This is apparently contrary to withholding tax regulations (withholding from consideration, payment or capital gain upon a sale of securities, mutual fund units or forward transactions, 2002). The regulations stipulate that “a party required to withhold tax under these regulations, shall supply the seller upon request, at the end of the year and no later than March 20 annually, a confirmation of capital gains in the preceding year and tax withheld” and various other details.

The CPA Institute says any change needs to be legislated. This wasn’t done and the change apparently has retroactive effect.

So companies must now go back to the beginning of 2021 and record all transactions and movements in securities – including all purchases and sales – and to apply index linkage according to the rate of inflation.

By contrast, many foreign banks do provide such data and summarize gains or losses on securities.

The CPA Institute issued a further update on April 13, following intensive discussions about the surprise scale-back of securities data on Form 867 for companies commencing with 2021. The ITA, banks and brokers are supposed to produce a “Form 867 confirmation breakdown form” listing transactions, gains and losses during the year. 

The timing of this is unclear. While you’re waiting, the CPA Institute says you can request the breakdown on an individual basis to your bank branch or broker. The CPA Institute asks accountants to let them know if such requests go unanswered.

It is not yet clear why this change for 2021 has suddenly popped up in 2022. Will individuals still receive a full Form 867?

We ourselves are a company with a securities account at one of the big Israeli banks. We can report that our 2021 Form 867 indeed excludes capital gains and losses, unlike our 2020 Form 867. We are going to be busy doing what used to be the bank’s job.

This can be an unexpected bureaucratic nightmare for some companies, and they should plan accordingly. This may mean extra clerical support, spreadsheets, initial calculations, loss offset calculations, et al.

Companies are in business to make money from what they know best. If they temporarily park money at a bank or financial institution, this won’t be in a deposit, as interest paid on them is close to zero. Instead, companies may consider temporary investment in securities, perhaps on a discretionary basis. There may be many such transactions over a year.

Now it seems that companies must reconstruct their 2021 investment transactions to ascertain for themselves whether they made a gain or loss on each and every transaction. They can no longer rely on annual confirmations from the banks.

All this suggests that companies might invest less with Israeli financial institutions and switch to foreign financial institutions in order to save time. Time is money. Will Tel Aviv Stock Exchange prices fall? Will the shekel exchange rate fall if companies switch out of shekels into foreign currencies?

As always, consult experienced tax and investment 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.