Tax scandal may hurt business prospects

Accountants claim workers at the ITA are shocked at the scandal rocking the agency.

Lawyers and accountants expressed growing concern Wednesday that the alleged bribery scandal tarnishing the integrity of the Israel Tax Authority's senior officials could impact business deal flow and thus the economy of the country. "Even if all the allegations prove to be baseless and unjustified, Israel Tax Authority workers are bound to be more conservative, hesitant and careful about taking responsibility over tax assessment decisions or rulings on for example issuing a so-called "pre-ruling" [tax preassessments]," said advocate Harel Locker, partner at the law firm Shochat, Locker & Partner, a specialist on tax issues. "If the tax authority's procedure in issuing pre-rulings is in any form impaired or slowed down, this will hurt the economy." Similarly, tax specialists feared implications of the scandal on Tax Authority rulings could harm the potential of future exit deals in the country. "In the short-term, we expect the tax authorities to be extremely correct and slower in their dealings with us and it will be much harder to resolve tax issues and inquiries, which in turn is bound to delay or uphold big deals and exits," a tax specialist with an international accounting firm told The Jerusalem Post. A key factor in many merger and acquisition transactions is the "pre-ruling," or advance assessment by consent granted by the Israeli tax authorities, to whom the law grants broad discretion to allow deal structures not contemplated by the wording of the law. These rulings have become a prevalent tool for taxpayers to mitigate the risks of uncertainty of tax results caused by the relatively slow process of tax legislation. "I represent a lot of foreign companies and for them the assessment of the tax issue is the first step when considering business opportunities in the local market," said Locker. "The law in Israel is not always clear and thus pre-rulings and similar tax arrangements are essential to interpret and clarify the law without having to go through lengthy legal procedures." In Israel, it has become standard practice since 2004 to obtain advance tax rulings before completing a big deal to secure tax consequences of a transaction. At the end of 2004, Eitan Rob, former director of Israel's Tax Authority who together with current director Jacky Matza is suspected of appointing people with contacts in business to key positions at the ITA, officially declared the inclusion of pre-ruling decisions in Israel, beginning January 1, 2005. As such, pre-ruling decisions generally should be given by Israel's Tax Authority within a time limit of 90-120 days. The decisions would be published on the Tax Authority Web site without revealing details of the taxpayer. If agreed, the decision would oblige both sides, in case of disagreement, the taxpayer may apply to Israel's court. The ITA is also prepared to rule on other tax matters such as transfer pricing, tax treaty issues, value-added tax aspects and so forth. Taxpayers apply to the Director of the ITA for a ruling regarding the liability to tax. All those procedures are likely to be delayed as a result of the scandal, the professionals said.