Will the Israel Tax Authority push for the Italian model of tax disputes?

The ITA raised the possibility of best-judgment assessments in transfer-pricing cases, among others, in a recent tax circular.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
The head of the Israel Tax Authority (ITA), Eran Yaacov, has indicated he proposes to initiate legislation adopting the Italian model. This has nothing to do with fast cars or tasty pasta. The intention is that before going to court in a tax case, the tax in dispute must be paid. This of course may make justice prohibitively expensive if the ITA ups the ante.
Suppose, hypothetically, in a case about transfer pricing between related companies in a multinational group, an Israeli tax official issues an estimated “best-judgment” tax assessment for a big amount, for example, a billion shekels.
This is not far-fetched at all. In fact, the ITA raised the possibility of best-judgment assessments in transfer-pricing cases, among others, in a recent tax circular.
Under Israeli tax law, such a tax assessment may initially be appealed to a different tax official who is, of course, a colleague of the first tax official who raised the billion-shekel assessment.
If that appeal fails, further appeal must be made within 30 days to the District Court, which is a serious matter. It would be even more serious if appeal to the District Court was conditional on paying the disputed billion-shekel tax amount. Court cases can take 10 or more years to resolve. That would be a long time to be a billion shekels out of pocket
The Israeli CPA Institute is up in arms. Last week the Institute fired off an indignant letter requesting to discuss this proposal.
“We are talking about draconian and extreme legislation, unprecedented in any country and not called for in the State of Israel.... We are aware that the current legal situation allows non-payment of tax in dispute by going to court [District Court only; the full tax is paid if appeal is made to the Supreme Court]... but only a tiny proportion of taxpayers abuse this.”
The CPA Institute concludes, “There is no logic in causing severe harm to the other normative taxpayers who request in good faith to have their day in court.”
It remains to be seen whether such a tax payment requirement will be passed by the Knesset.
THERE IS no doubt that the ITA takes a lot on itself. For example, it has a policy of denying the aliyah 10-year tax holiday for immigrants who happen to hold shares or options in a foreign parent company of their employer under the capital track Section 102 of the Income Tax Ordinance. The ITA argues that 25% tax is a good deal. They ignore 0% even if it is apparently allowed under the tax rules. Immigrants might not really want to go to court to enforce their rights and wait years for the result.
What is needed? For some reason Israel lags behind other countries, as it lacks a tax- tribunal system of redress for complaints about tax matters.
The US and Canada has a system of tax courts, and 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 better 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.
The District Courts have, in recent years, hired ex-tax lawyers as judges who are good on knotty points of law, but may not provide the best forum for complaints about heavy-handed bureaucracy of tax officials.
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 this is sorely lacking in Israel.
Moreover, the UK system includes a cute rule that Israel would do well to copy: A UK taxpayer can ask the UK HMRC (Her Majesty’s Revenue and Customs) to cancel tax owed if HMRC didn’t act on information that the taxpayer or his/her employer gave HMRC. A similar rule in Israel would surely keep the ITA on its toes.
To sum up, the Israel Tax authority should introduce a tax court/tribunal system to collect fair tax fast and clean up the tax environment for businesses and others at low cost. Israel would benefit greatly from this.
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. leon@h2cat.com