Recent roundup of Israeli taxation

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
While recent vaccine developments provide a glimmer of hope, the coronavirus pandemic is here for a while longer, and there was an election in the US. Below are a few Israeli business taxation developments and some thoughts about what the future might bring.
Accelerated depreciation
After lengthy debate, the Knesset Finance Committee has just approved regulations that may allow double the depreciation normally allowed for Israeli tax purposes, but for a limited period. This will apply to equipment purchased in the period from September 1, 2020-June 30, 2021. In the industrial sector, double depreciation will be allowed for nine months. In the commercial and services sector, double depreciation will generally be limited to six months, rising to nine months only if “massive” equipment is purchased that cannot be put into service within three months.
What does this mean in practice? Suppose a service firm buys a new personal computer and software costing NIS 5,000 on January 1, 2021. The regular annual depreciation rate is 33%. So, for the first six months in 2021, 33% depreciation may be claimed (33% x 2 x 6/12). For the second six months, 16.5% depreciation may be claimed (33% x 6/12). Therefore, total depreciation that may be deducted from taxable profits in 2021 should be 49.5% of NIS 5,000, i.e. NIS 2,475 compared with 33% in a regular year.
How much tax will the accelerated depreciation save? For a company that pays 23% tax, the tax saving from extra depreciation should be NIS 190 in this example (= NIS 5,000 x 16.5% extra depreciation x 23% company tax).
Is this NIS 190 tax saving for real? Not really. Accelerated depreciation means you depreciate the cost of the equipment sooner rather than later, a timing difference only. That didn’t stop the Treasury from moaning at the Knesset Finance Committee about reduced tax revenues of around NIS 2.5 billion. Really those tax revenues are delayed not lost altogether.
Will the accelerate depreciation encourage the Israeli business sector to invest more money in equipment? Perhaps not. An NIS 190 timing difference on a computer in the above example is not too exciting.
What about corona grants?
To briefly recap: First, the government intends paying “social grants” of up to NIS 15,000 every two months to freelancers and company owners regarding the period May 1, 2020-June 30, 2021. This is provided there was a sales drop of at least 25% in the grant-entitlement months compared with the previous year, AND taxable income in 2018 or 2019 was in the range of NIS 8,568-NIS 651,600.
Second, bimonthly fixed-cost participation grants of NIS 3,000-500,000, depending on size and other factors, are available regarding the period of May 2020-June 2021.
Third, other grants have come and gone, such as back-to-work grants of up to NIS 7,500 per employee.
Fourth, a reduction in municipal taxes (Arnona) of up to 95% is possible until June 2021 if annual sales were up to NIS 200 million but dropped by 60%, or NIS 200-NIS 400 million and dropped by 80%.
Businesses should consult their accountants for more details.
Corona grant issues
Some corona grant issues have emerged.
For example, the government needs bank details so they know where to pay the grants. Also, if you started in business in 2019 on one date, but only managed to open a tax file at a later tax date, it might be necessary to appeal to [email protected]
And if you made less than NIS 651,600 in 2018 or 2019 after netting off any losses, the Israel Tax Authority adds back those losses!
If you are a passive property owner who doesn’t keep monthly business accounting records, you don’t qualify for freelancer corona grants.
Accountants are experiencing long delays in getting replies to queries about corona grants.
And a search is still under way for a solution to the problems that female freelancers and company owners experience in getting grants if they also receive maternity grants. New instructions are expected soon.
Impact of US presidential election?
At the time of writing, we await formal ascertainment of the election result. President-elect Joe Biden has indicated he might tighten US tax rates and rules.
On the international side, it is assumed a Biden administration would be more cooperative in embracing recent OECD proposals for reforming international taxation, especially for digital and e-commerce operators.
If so, this could be relevant for Israeli tech companies and internet suppliers of products and services in 2021. We await developments. Watch this space.
As always, consult experienced tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. [email protected]