On April 25, the OECD published its report on “How to Improve Taxes and Transfers in Israel.” On the whole the report is balanced and appreciative of Israeli fiscal policy initiatives in recent years.BackgroundAccording to the report, high interest payments and large defense spending make deficit and debt reduction more difficult, socioeconomic divides remain wide and as a small open economy, Israel is highly exposed to mobile international capital and competition over international investment.[email protected] The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.And the incorporation of environmental issues into the tax system remains only partial.How does Israel score?Since 2007 personal income tax and corporate income taxes, which were close to the OECD average share of GDP, have improved markedly. This continued until the “tent protests” of 2011 and the need to meet spending commitments rather than continue tax reductions.Instead Israel has made heavy use of indirect taxes, especially value-added tax. The OECD says Israel’s VAT system is “admirable” for having a single rate (currently 18%) with few exemptions. Lower additional VAT rates are said to be difficult to target towards the less affluent.The report has interesting graphs, but few legible numbers. The pruning of home capital gain exemptions in 2013/14 is described as a “welcome move.” Higher city taxes (arnona) on vacant homes are also welcomed, but assessing this by reference to water consumption is mocked – people may just leave the tap on a little...On the corporate side, the OECD says that investors value responsible macroeconomic policy. Given that recent increases in the main corporate tax rate reflect efforts to bring fiscal balances back on track, “the investment community has taken a less dim view...”But further hikes in the corporate tax rate could be damaging.Tax compliance bureaucracy is high. World Bank statistics cited indicate that in Israel it takes 235 hours on average (per year?) to make 33 tax payments, compared with 80 hours in Ireland to make 8 payments.But Israel’s impressive scoring on R&D and hi-tech activity is said to raise policy lessons for other countries. And Israel’s targeted tax incentives and subsidies for business, especially technology-based, present an alternative to the exploitation of tax loopholes and BEPS (base erosion and profit shifting, usually offshore).What is recommended?According to the OECD report, dealing with high poverty rates and low employment rates, especially in the ultra-Orthodox community and Arab-Israeli sector “needs to remain a policy priority.” Therefore, the OECD recommends pressing ahead with the earned income tax credit (“negative income tax”).Households can receive a payment from the tax authorities if such people work, have relatively low income and have children. This exists in Israel, but the take-up is low.Free daycare for children and improved education for such communities are also recommended by the OECD.The pension age for women should be raised from 62 to 67 as for men according to the report.On the tax side, the OECD makes various proposals.The OECD recommends removing VAT exemptions on fruit and vegetables and services in Eilat. Customs duties on consumer goods should continue to be reduced.A shift to taxing vehicle use is proposed, such as fee-based reserved lane systems and urban congestion charges. The report advocates tightening the tax treatment of company cars.Consider an economy-wide carbon tax based on emissions and environmental levies.The OECD supports Israeli government plans to all review tax breaks and support schemes granted to firms, and to “ensure taxation is adequate” in the resource (=gas) extraction sector.A capital gains tax at death is recommended by the OECD.To address bureaucracy, the OECD says the number of tax payments should be lowered and web-based payments should be increased. Also, a tax unit for large taxpayers is recommended (actually there already is one – the assessing office for large enterprises “pashmag”) Tax breaks for mandatory pension contributions are said to be “wasteful.”There is said to be “practically no economic justification” for maintaining tax breaks for “advanced training funds [kranot hishtalmut].” (Some might disagree with this analysis – an aging society needs to save money).The OECD also recommends raising the betterment levy (hetel hashbacha) on property rezoning gains.Comments:The Israeli government is unlikely to object to these proposals.A tax at death would, however, be politically controversial.Small and medium businesses might like to see the increasing use of penalties and bank freezes addressed. The OECD knows what the Israeli government officials it consulted think, it is unclear whether taxpayers and their advisers were also consulted.As always, consult experienced tax advisers in each country at an early stage in specific cases.