'Pandora Papers tax evaders probably didn't break the law' - explainer

Many Israelis were listed in the "Pandora Papers," a series of documents that reveal the offshore dealings of hundreds of world leaders, celebrities, and billionaires.

The tax authorities know (photo credit: REUTERS)
The tax authorities know
(photo credit: REUTERS)

“While it is very sexy to say the Pandora Papers expose criminal activity by all of these rich and powerful people, the truth is that we will probably find out that most of the Israelis on the list are in full compliance with Israeli law,” according to attorney Harel Perlmutter, a partner and head of the tax department at the Barnea Jaffa Lande & Co. law firm.

Many Israelis were listed in the “Pandora Papers,” which revealed the offshore dealings of hundreds of world leaders, celebrities and billionaires in what is being called the largest trove of leaked offshore data in history. However, the legal ramifications for most of those listed are not yet clear.

“Tax evasion is not what it looks like in the news,” Perlmutter said. “In the 1980s and 1990s, it was much easier to hide assets in tax havens to reduce tax obligations. It is much harder now.”

A tax haven is a country where a foreign individual or business can set up a corporation and bank account with zero or minimal tax liabilities. Monaco, Switzerland, the Bahamas, Cayman Islands, Panama and the United Arab Emirates are some of the better-known places where wealthy people are known to park assets and avoid tax collectors in their home countries.

However, there are legal and illegal ways to evade taxes with the use of tax havens, Perlmutter said.

“What is illegal is setting up a company or moving assets to a tax haven and not reporting it to tax authorities,” he said. “That is a criminal offense that is punishable by up to 10 years in jail for each instance, plus a requirement to pay the money along with interest and heavy fines. Any time you don’t report assets, no matter where they are located, it’s a criminal offense. Even if certain income is exempt from taxes, it still has to be reported.”

Finance Minister Avigdor Liberman met with department officials to discuss Israel's accession to  the OECD Digital Economy Taxation Outline, June 22, 2021. (credit: SPOKESPERSON OF THE FINANCE MINISTER)Finance Minister Avigdor Liberman met with department officials to discuss Israel's accession to the OECD Digital Economy Taxation Outline, June 22, 2021. (credit: SPOKESPERSON OF THE FINANCE MINISTER)

Technological advances have made it harder for illegal tax evaders to avoid getting caught. In 2014, the OECD developed the Common Reporting Standard (CRS), a mechanism for tax authorities in some 200 countries to share information about financial accounts, to combat tax evasion. Israel committed to the standard in 2018.

“Virtually every country in the world shares information through the CRS,” Perlmutter said. “That means if you are hiding assets, it is not a question of if you will get caught, but when.”

Regarding legal tax evasion, Perlmutter said: “Israel’s Tax Authority recognizes the right of individuals and businesses to structure their operations in the way that is most financially sound. You are allowed to set up assets in ways that legally maximize tax benefits, and it is wise to do so.”

Many Israelis have bank accounts in other countries, often at taxation rates that are lower than Israel’s, he said. Many jurisdictions offer zero-rate taxes to foreigners to promote international activity. Israel is viewed as a tax haven for olim (new immigrants), who receive among their initial benefits 10 years of tax exemption for income earned abroad.

“But it all has to be reported,” Perlmutter said.

Israel requires its residents to pay taxes on income earned worldwide, so it is very difficult for them to be able to claim that certain income is tax-exempt.

Israelis who physically stay in Israel for more than 183 days of a tax year are considered to have their “center of life” in Israel and are required to pay taxes on income earned at home or abroad. Many high-net-worth individuals try to time their stays in Israel to remain under that threshold to avoid tax requirements.

Sophisticated tax structures and shell companies can be created legally in different locations to shelter one’s assets from tax exposure. However, these can be very expensive to set up and are only worthwhile for the wealthy, Perlmutter said.