Reportable tax positions

They say confession is good for the soul. It is also good for the Treasury. Israeli tax law now requires disclosure of reportable actions, reportable opinions and reportable positions to the Israel Tax Authority.

On December 26, 2016, the ITA published the first batch of reportable positions: 31 relating to income tax, 11 relating to VAT and 16 relating to customs. The ITA says this will help them deal with illegitimate tax planning.

If you report a position, you can expect a tax audit sooner or later. If you fail to report a reportable position, you may be deemed to have failed to file a tax return. However, some positions are likely to stir up controversy.

Reporting rules

A reportable income-tax position is a position contrary to a position published by the ITA by the end of the year concerned if the tax advantage exceeds NIS 5 million in the tax year or NIS 10m. over four years. But no reporting is needed from certain Israeli charities, nor from individuals or companies with income below NIS 3m. or capital gains below NIS 1.5m. in the tax year.

For VAT and customs purposes, the tax-advantage threshold is NIS 2m. in the year or NIS 5m. over four years.

The income-tax positions must be reported within 60 days after filing the main annual income-tax return, and the VAT positions must be reported within 60 days after the year-end. However, an ITA announcement this January 30 extends the first VAT position reporting deadline to this June 30 to give us (and them) a chance to digest it all.

Reportable income-tax positions

Claiming depreciation not in the depreciation regulations.

Claiming preferential tax rates for preferred/approved enterprises if you are an individual rather than a company.

Transferring tax exemptions to others upon death of the original taxpayer.

Claiming that a tax treaty overrides the “exit tax” (capital-gains tax) if you cease to be Israeli resident.

Claiming an aliya 10-year tax break for business activities in Israel (as opposed to abroad) in the case of new residents and senior returning residents (who lived abroad at least 10 years).

Claiming a credit for foreign taxes later refunded unless an amended Israeli tax return is filed.

In the case of foreign investors, claiming an exemption from Israeli capital-gains tax from renewable-energy projects on Israeli soil.

Interposing an unrelated party in transactions indirectly between two related parties (as this may defeat the spirit of transfer-pricing rules). In the case of cost-plus transfer pricing, share-option gains should be included in the cost base, according to the ITA.

Trusts

When it comes to trusts, two ITA positions may transform no tax into full tax. The ITA claims that if an individual is excluded from being a beneficiary so long as he is an Israeli resident, he is deemed to be a beneficiary anyway.

• Comment: This is questionable and unfair, as the Income Tax Ordinance requires the trust documentation of a foreign-resident beneficiary trust to expressly state that an Israeli resident may not be added as a beneficiary.

Another position states that a contingent beneficiary is an actual beneficiary; this may trigger Israeli tax.

• Comment: This is incomplete, as the Income Tax Ordinance states that a person is NOT a beneficiary if the contingent beneficiary’s entitlement is contingent upon the future death of the settlor or another beneficiary.

Reportable VAT positions

Importing services from abroad where the service is consumed in Israel, intended for consumption in Israel or relates to an asset in Israel, for example, services of a foreign-resident architect regarding a property in Israel.

• Comment: This is highly controversial; surely importing a service from abroad is a normal legitimate act and not a reportable position? And the Israeli tax advantage may be zero if the service recipient applies the “reverse charge” (self-billing) procedure in the VAT regulations. Moreover, this position may be discriminatory against foreign service suppliers and not entirely consistent with Israel’s tax treaties.

Reportable customs positions

Failure to include franchise fees, warranty, discounts, CIF costs, related royalties and services in the customs value.

Closing comments

Be aware of these reportable tax positions; the ITA has used them to promote its own position where possible. Getting a legal opinion may not help much. It remains to be seen whether they may be appealed or subject to Knesset or judicial review.

As always, consult experienced tax advisers in each country at an early stage in specific cases.