Tax treaty amend­ments

The Jerusalem Post - - BUSINESS & FINANCE - • By LEON HAR­RIS

In 2018, the coun­try’s 56 tax treaties may be amended in one go af­ter sign­ing on June 7 the OECD mul­ti­lat­eral in­stru­ment to im­ple­ment tax treaty-re­lated mea­sures to pre­vent base ero­sion and profit shift­ing. BEPS is the OECD pro­gram aimed at pre­vent­ing off­shore tax plan­ning by multi­na­tional groups. Many other coun­tries are do­ing the same.

But it takes two to tango. The treaties will be amended if the treaty part­ners fol­low suit. Sub­ject to this, we re­view be­low the an­tic­i­pated changes to the coun­try’s tax treaties. These changes are ex­pected to take ef­fect in 2018 ac­cord­ing to Is­raeli tax of­fi­cials. A for­mal an­nounce­ment to this ef­fect is an­tic­i­pated.

Div­i­dends, real es­tate cap­i­tal gains:

Is­rael in­tends to amend 36 treaties (not with the US or UK) to al­low re­duced tax rates for div­i­dends only if rel­e­vant own­er­ship con­di­tions are met through­out a 365-day pe­riod in­clud­ing the div­i­dend pay­ment date.

Is­rael in­tends to amend all its treaties to al­low tax in a coun­try upon a sale of an in­ter­est in a com­pany, part­ner­ship or trust that de­rived more than 50% of their value from real es­tate in that coun­try at any time dur­ing the 365 days pre­ced­ing the sale.

Per­ma­nent es­tab­lish­ment:

Tax plan­ning by multi­na­tion­als and the dig­i­tal econ­omy have taken a huge toll on gov­ern­men­tal tax rev­enues in re­cent years. One tech­nique was to al­lo­cate prof­its to the cloud, which is nowhere for tax pur­poses.

So the con­cept of a PE – a tax­able fixed place of busi­ness or a “de­pen­dent agent” – will be tight­ened in all Is­rael’s treaties.

A tax­able de­pen­dent agent would now be a per­son in a coun­try who: (1) ha­bit­u­ally con­cludes con­tracts (2) or plays the prin­ci­pal role lead­ing to the con­clu­sion of con­tracts rou­tinely with­out ma­te­rial mod­i­fi­ca­tion; and these con­tracts are: (a) in the name of a for­eign en­ter­prise, or (b) for the trans­fer of own­er­ship or right to use prop­erty owned or used by the for­eign en­ter­prise, (c) for the pro­vi­sion of ser­vices by the for­eign en­ter­prise.

Fur­ther­more, a re­lated com­pany (over 50% con­trol in terms of votes or value of shares by one party over the other, or com­mon con­trol) act­ing ex­clu­sively or al­most ex­clu­sively for the group would now be con­sid­ered a de­pen­dent agent.

More­over, Is­rael joins a cho­rus of other coun­tries that will now treat ware­houses as a PE. They will no longer be con­sid­ered prepara­tory or aux­il­iary. These rules com­pli­cate e-com­merce for large and small op­er­a­tors, and may spell the death sen­tence for in­ter­na­tional agency ar­range­ments.

Treaty de­nial for res­i­dents?

Con­tro­ver­sially, when tax­ing res­i­dents, Is­rael re­serves the right to deny nu­mer­ous treaty ben­e­fits, re­gard­ing: for­eign tax cred­its, cor­rel­a­tive or cor­re­spond­ing ad­just­ment fol­low­ing an ini­tial ad­just­ment by an­other treaty coun­try (but see be­low), ser­vices ren­dered to a for­eign gov­ern­ment, stu­dents re­searchers and pro­fes­sors, dis­crim­i­na­tory tax­a­tion, com­pe­tent author­ity ap­peals, pen­sion and al­imony tax­a­tion abroad only and other treaty ex­emp­tions. That doesn’t leave much.

For ex­am­ple, if the US In­ter­nal Rev­enue Ser­vice claims an Is­raeli on­line oper­a­tor has a tax­able US per­ma­nent es­tab­lish­ment and the Is­rael Tax Author­ity dis­agrees, the Tax Author­ity may refuse to give a for­eign tax credit, re­sult­ing in dou­ble tax­a­tion. The US may play fair, some other coun­tries may not, re­sult­ing in un­cer­tainty which treaties are af­fected.

Cor­re­spond­ing ad­just­ments:

Un­der a sep­a­rate clause, if an­other coun­try makes a trans­fer pric­ing ad­just­ment to the prof­its of an Is­raeli res­i­dent en­ter­prise, Is­rael in­tends to grant a cor­re­spond­ing ad­just­ment un­der all its treaties to the amount of tax charged, but “due re­gard” will be had to other treaty pro­vi­sions and the com­pe­tent tax author­i­ties shall if nec­es­sary con­sult each other. Com­ment: This may drag on...

Dis­pute res­o­lu­tion:

The OECD wants to make it pos­si­ble for tax­pay­ers to lodge treaty ap­peals to the com­pe­tent tax author­ity of ei­ther coun­try in­volved. Is­rael re­serves the right un­der all its treaties to in­sist on treaty ap­peals be­ing made to the home coun­try tax author­ity. Is­rael is not join­ing a manda­tory me­di­a­tion pro­ce­dure.

Trans­par­ent en­ti­ties:

This refers to US LLCs Is­raeli fam­ily com­pa­nies and other com­pa­nies where the share­holder is taxed, not the com­pany. In­come would be con­sid­ered to be de­rived by a res­i­dent of a treaty coun­try if the in­come is taxed as in­come of a res­i­dent there.

Dual res­i­dent en­ti­ties:

Is­rael in­tends to amend all its treaties to say that dual-res­i­dent en­ti­ties will be con­sid­ered res­i­dent where its place of ef­fec­tive man­age­ment is. This would im­prove things un­der the Is­rael-US treaty if the US fol­lows suit. (It prob­a­bly won’t.)

Treaty abuse:

Is­rael in­tends to amend all its treaties to say that their pur­pose is to elim­i­nate dou­ble tax with­out cre­at­ing op­por­tu­ni­ties. Is­rael in­tends to tighten up 15 of its treaties (in­clud­ing those with Ger­many, In­dia, Ire­land, Malta, Panama and Rus­sia) to deny a treaty ben­e­fit if it is rea­son­able to con­clude that ob­tain­ing the ben­e­fit was one of the prin­ci­pal pur­poses of any ar­range­ment or trans­ac­tion – un­less this was in ac­cor­dance with the pur­pose of the rel­e­vant pro­vi­sions in the treaty.

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

Leon Har­ris is a cer­ti­fied pub­lic ac­coun­tant and tax spe­cial­ist at Har­ris Con­sult­ing & Tax Ltd.

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