YOUR TAXES: The year-end is nigh

The tax law allows you to consider writing off bad customer debts and make reasonable provision for doubtful debts.

money (photo credit: REUTERS)
(photo credit: REUTERS)
Tax planning is legitimate so long as it fits in with legislative intent. Tax planning should be done at year-end if not before. The Israeli tax year ends on December 31. There are many things to consider including those outlined briefly below.
The big picture
The Israeli government is currently on auto pilot and is running a deficit of around 4% of GNP. It should be around 3% or less. So it is fair to assume that the next government will be forced to reduce expenditure (not easy) or raise taxes.
On the business side
Given the above, businesses should consider among other things: income and income timing; expenses and expense timing; inventory (stock) count on December 31; other accruals or provisions. Is long-term project planning possible? What about charitable donations?
The tax law allows you to consider writing off bad customer debts and make reasonable provision for doubtful debts. Inventory write-offs or destruction require notification to the local tax office.
Inter-company transactions between related parties must be on arm’s-length terms. Transfer pricing studies are necessary and helpful. Related means at least 50% of any means of control or common control.
OECD proposals (Pillar 1 and Pillar 2) would re-allocate some group profits to countries with customers or users, starting in 2020 or 2021, and lay down a minimum global tax rate! Hi-tech companies from Israel and the US may incur heavier taxes on profits in the EU and elsewhere.
Already caught are certain overseas agents, warehouses and fulfillment houses.
In the US, sales over $100,000, or 200 shipments to most states, trigger sales tax at various local rates (thousands of localities!) following the Wayfair Case Supreme Court judgment in 2018. In the EU, cross-border electronic B2C services are now “VATable.”
International groups must therefore check what action is needed now to mitigate all this.
In Israel, so called “wallet companies” (hevrot arnak) face a battery of rules that can turn the 23% company tax rate on profits into income tax at rates ranging up to 50%.
This is possible if a closely held company provides managerial or officer services, services of an employment nature, or derives 70% of revenues or profits from one customer/group for 18 months in any period of four years.
Also caught are loans to (not from) major shareholders over NIS 100,000 or personal use of company assets. Check what needs doing. Loans to 10%-or-more shareholders outstanding at the end of 2018 should be repaid before the end of 2019 (and not reinstated).
Are your pension, study funds (hishtalmut) and life insurance enough? Major shareholders of private companies should consider pension funding and severance funding within limits, plus side plan funding under Amendment 190 of the Income Tax Ordinance. Mandatory pension funding applies to employees and the self-employed.
Study funds (kranot hishtalmut) are very tax efficient if you contribute each year for six years at prescribed rates. Consult a pensions/insurance specialist about monthly funding and annual top-ups BEFORE December 31.
On the personal side
Before you reach 120, do you and your spouse have up-to-date wills in each relevant country? If not, consult your lawyer immediately.
Before others reach 120, are you expecting an inheritance from abroad? If so, you should plan against double tax – inheritance/estate tax abroad and capital gains tax in Israel upon a subsequent sale.
Personal investments: Check foreign taxes, and any Israeli foreign tax credit or aliyah exemption? Have you filed Israeli half-yearly capital gains tax reports regarding foreign securities sold?
Aliyah tax breaks: Are you a new or senior returning resident who lived abroad for 10 years? If so, do you optimize the aliyah 10-year exemption for foreign income and gains?
Most trusts with an Israeli resident settlor or beneficiary are now taxable in Israel, unless an aliyah exemption applies or other exemptions in certain cases. Needs checking,
Are your pension, study funds and life insurance enough? See above.
Israeli real estate briefly: Israeli home rental income over NIS 5,090 per month (in 2019) is taxable. Above that level, there are multiple possibilities, check which suits you.
Charitable donations this year to approved Israeli charities in the year may qualify for a 35% tax credit, within certain limits (minimum NIS 190, maximum NIS 9,322,000 or 30% of income). For example, if you donate NIS 1,000, you may get a NIS 350 reduction in your Israeli tax bill.
Do you need a tax amnesty? The current Israeli program expires for requests made after 2019.
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 Horowiz Consulting & Tax Ltd. [email protected]