How to dramatically improve Israeli tax administration - opinion

In most countries, tax law amendments accompany the annual government budget process. In Israel, the budgetary process is stalled for political reasons.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
The Israeli tax system was inherited from Britain upon independence back in 1948, but there are some differences. One of them concerns the lack of a tax tribunal system, which serves to increase the perceived power of the Israeli Tax Authority (ITA) over the taxpayer.
The ITA is making increasing use of administrative tax circulars, tax rulings (published and unpublished) and reportable tax positions to law down the ITA’s version of what the law says or meant to say. Israeli accountants and taxpayers often find themselves disagreeing.
Sometimes, the ITA sends draft laws to the cabinet and then to the Knesset for enactment to clarify or amend the text of Israel’s tax laws.
In most countries, tax law amendments accompany the annual government budget process. In Israel, the budgetary process is stalled for political reasons.
What do taxpayers and the ITA disagree about?
Many areas are open to disagreement – here are a few examples.
Olim are supposed to enjoy a 10-year Israeli tax holiday on foreign income and gains. But the ITA has a policy stated in tax circular 1/2011 of denying olim a tax exemption for work done abroad if the taxpayer was abroad under 40 days. There is no 40-day threshold in the law.
The ITA has a policy stated in tax circular 9/2011 of denying aliyah exemptions completely for olim who participate in employer share ownership plans (ESOPs) approved under Section 102 of the Income Tax Ordinance (ITO) – the ITA says that 25% tax is sufficiently low, no need for 0% tax under different sections of the tax law.
This is controversial, especially for olim hi-tech employees.
Recently in reportable tax position 83/2020 the ITA stipulated that transfers of assets from one Israeli residents’ trust to another triggers capital gains tax.
This is sometimes done to take foreign beneficiaries out of the Israeli tax net. But position 83/2020 arguably departs from ITO provisions.
As for fiscal residency in Israel, the ITA sometimes adopts an aggressive position, saying that a taxpayer’s center of living shifted to Israel after only 30-80 days presence in Israel.
On the procedural side, the ITA is quick to impose demands to pay monthly income tax installments, interest and lateness fines, even if you did not know because the relevant demand arrived late by post and is not copied to your accountant. And the ITA deploys punishments – bank account freezes, bailiffs at your door, and more.
What is the appeal procedure?
Appeals against a tax assessment are filed with a colleague of the tax official concerned, and if this is unsuccessful, straight to the District Court under ITO Section 153. There is no tax tribunal system on the way. Court proceedings can take years (often case decisions go back 5-15 years), cost a lot, and may still not succeed if the judge is swayed by tax revenue considerations.
And the ITA can up the ante with deficiency fines of 15%-30% of the tax difference per your tax return and their tax assessment under ITO Section 191.
This happens if the tax difference on the ITA tax assessment is more than 50% of the tax on the taxpayer’s filing, unless the taxpayer can disprove negligence to the ITA’s satisfaction.
Tax tribunals needed in Israel:
For some reason, Israel lags behind other countries as it lacks a tax tribunal system of redress for complaints about tax matters. It is time to reform ITO Sections 153 and 191.
The US and Canada have a system of tax courts, the UK has a tax tribunal system.
Generally, the tax court/tribunal process deals with the bulk of tax disputes, thereby reducing the burden on the regular court system.
Typically, tax courts/tribunals are preferable because they are less formal than regular courts, they are much faster, and taxpayers generally don’t need to incur the cost of hiring lawyers. Taxpayers can go in themselves or send in their accountant. Moreover, tax court/tribunals are often perceived to be fairer as the judges typically have their own business and/or tax experience.
Furthermore, in the US and UK tax court/tribunal systems, cases are often determined or agreed without the need for a hearing, if the written complaint filed speaks for itself. All of this is sorely lacking in Israel.
To sum up:
The next Israeli government should introduce a tax court/tribunal system to improve checks and balances and clean up the tax environment for businesses and others. Israel should benefit greatly at low cost.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
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The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.