Your Taxes: What use is the OECD?

Don’t let any background noise put you off – things have changed.

OECD 311 (photo credit: Associated Press)
OECD 311
(photo credit: Associated Press)
Organization of Economic Cooperation and Development Secretary- General Angel Gurria on May 10 announced that the OECD’s governing council had decided to accept Israel as a full member. Israel is thus becoming a member of a prestigious economic club with only 34 members, considered the leading economies of the world. Is this a big deal? Finance Minister Yuval Steinitz clearly thought so, saying: “Israel’s accession to this prestigious organization is possible due to a responsible and balanced economic policy, led by governments of past decades.
This policy included the reduction of Israel’s debt, monitoring of fiscal policy and the development of capital markets. Israel’s accession to the OECD brings great honor to the Israeli economy and fills our hearts with pride.”
Fortunately, Steinitz added: “However, although this important day is a time for celebration, we are only at the beginning.
Israel will be required to continue to demonstrate its economic strength and stability, and from today, also meet mandatory rules and standards.”
In recent years, OECD teams of experts reviewed Israel’s commercial and tax legislation in conjunction with every government ministry. A Finance Ministry press release on May 10 anticipated ramifications from Israel’s accession to the OECD, including the following: • Attraction of foreign investors.
• Positive influence on Israel’s credit rating.
• Israel will be required to meet OECD standards for activities in international markets (OECD double-taxation-avoidance agreement, adopting OECD laboratoryquality rules and anticorruption rules) and will become a full partner in the establishment of new international standards.
• Learning from the “best practices” of member countries in the organization.
• Analyzing social needs and establishing ways to decrease inequality and social gaps.
• Implementing reforms in the area of environmental protection, including the improvement of environmental quality and prevention of soil, water, air and sea.
What about the tax side? As indicated above, Israel will be required to meet OECD standards. In particular, the OECD has issued a model tax convention (referred to above as a double- taxation-avoidance agreement) and a detailed commentary thereon.
However, now that Israel is a member of the OECD, it will be more difficult for an Israeli tax assessing officer to read the commentary and then do the opposite.
The introductory blurb to the OECD model convention states: “Member countries, when concluding or revising bilateral conventions, should conform to this Model Convention as interpreted by the Commentaries thereon and having regard to the reservations contained therein... and their tax authorities should follow these Commentaries, as modified from time to time...
subject to their observations thereon.”
So if an Israeli tax official disagrees with the OECD commentary, he must still follow it unless the Israeli government has entered a reservation or observation. So far, the Israeli government apparently hasn’t entered any reservations or observations on the model convention; this would have diplomatic as well as fiscal consequences.
We await a court case in this area. When the UK joined the EU, it took a while for the British to get used to EU law on top of their own. It remains to be seen what happens to OECD principles and Israeli law.
E-commerce example? An example of where OECD tax rules may now prevail is that of electronic commerce on the Internet. Israel doesn’t have any specific rules on this, but the OECD model convention and commentary do.
According to the OECD, a permanent establishment (taxable fixed place of business) does NOT include an Internet site, ISP hosting, providing a communication link, advertising of goods and services, relaying information through a mirror server, gathering marketing data and supplying information. But a permanent establishment does include an unmanned server and e-tailing sales and commerce over the Internet.
To sum up Israel has entered a brave new world requiring it to play by internationally accepted rules of the game in economic matters. It is probably like the FIFA World Cup in South Africa: players who foul, get a yellow card, followed by a red one.
Don’t let any background noise put you off – things have changed.
As always, consult experienced tax advisers in each country at an early stage in specific cases. Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.