Tax planning starter kit

Those that look ahead, get ahead. Business profits and taxes need to be monitored regularly, especially toward the tax-year end of December 31. Below is a starter list of planning tips to check out.

On the business side:

First, a business plan. What are your goals and are you achieving them? What is your competitive advantage? What is your strategy for expanding revenues: Seek new customers and/or buy a business?

Second, your present situation. Can costs be trimmed and cash flow improved? Were sufficient tax installments paid?

Third, year-end planning. The 2018 company tax rate for profits of 23% is expected to continue in 2019. As for self-employed (unincorporated) businesses – their income tax and national insurance bills may range from almost nothing to 50% on profits exceeding NIS 641,880 in 2018. Nevertheless, consider among other things: income and income timing; expenses and expense timing; inventory count and levels; other accruals or provisions. Is long-term project planning possible? What about charitable donations as these may confer tax breaks?

Fourth, so called “wallet companies” (hevrot arnak) face a battery of rules that can raise turn the 23% company tax rate into income tax at rates ranging up to 50%. This is possible if there are fewer than four unrelated customers, loans of over NIS 100,000 to (not from) major shareholders, or personal use of company assets. Check what needs to be done.

Fifth, are your pension, study funds (hishtalmut) and life insurance enough? Major shareholders of private companies should consider pension funding and severance funding with limits, plus side plan funding under Amendment 190 of the Income Tax Ordinance. Mandatory minimum pension funding applies to employees and the self-employed. As for study funds, these are highly 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.

Sixth, do you optimize the aliyah 10-year exemption for foreign income, if relevant? Many don’t.

Seventh, will other moderate tax planning save you money? Are you an exporting producer? If so, do you qualify for preferred enterprise tax breaks (9%-16% company tax and 20% dividend withholding tax)? Has the transfer pricing between your entities been reviewed and optimized?

Eighth, have you considered the recommendations of the OECD regarding “base erosion profit shifting”? For example, if you use overseas agents or warehouses, is it necessary to change this?

Ninth, if you are engaged in e-commerce, are you ready for tax changes in the US states (Wayfair case), EU (digital services) and elsewhere?

Tenth, is it time to incorporate? Are profits increasing or do you need legal protection?

Eleventh, are your tax reporting and payments up to date? If not, the Tax Authority can impose fines, freeze your bank accounts, and stop you doing business with governmental entities and public corporations. Are all employee matters up to date?

On the personal side

First, before you reach 120, do you and your spouse have up-todate wills in each relevant country? If not, consult your lawyer immediately.

Second, 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.

Third, 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?

Fourth, aliyah tax breaks. Are you a new or senior returning resident who lived abroad 10 years? If so, do you optimize the aliyah 10-year exemption for foreign income and gains?

Fifth, most trusts with an Israeli resident settler or beneficiary are now taxable in Israel, unless an aliyah exemption applies or other exemptions in certain cases. Needs checking.

Sixth, are your pension, study funds (hishtalmut) and life insurance enough? See above.

Seventh, Israeli real estate briefly: Israeli home rental income over NIS 5,010 per month (in 2018) is taxable. Above that level, there are multiple possibilities, check which suits you.

Eighth, charitable donations this year to approved Israeli charities in the year may qualify for a 35% tax credit, within certain limits. For example, if you donate NIS 1,000, you may get a NIS 350 reduction in your Israeli tax bill.

Ninth, do you need to request a tax amnesty? Financial institutions around the world now check the tax credentials of accounts and international cash transfers, due to the Foreign Account Tax Compliance Act of the US and Common Reporting Standard of the OECD.

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 Consulting & Tax Ltd. leon@ hcat.co.