Summary of budget proposals for 2017-2018
YOUR TAXES
The Finance Ministry this week published more wide-ranging proposals regarding the 2017-18 budget, and it invites the public to comment no later than next Monday. The proposals then go for debate before the cabinet and then the Knesset.
The reason for such a rush over something so important over a summer weekend when many are away is unclear. Nevertheless, here is a brief summary:
Immigrants reporting exemption: Currently, new residents and senior returning residents who lived abroad 10 years enjoy exemptions for 10 years as follows : (1) exemption from paying Israeli tax on foreign-source income and gains, and (2) exemption from reporting foreign-source income and gains to the Israel Tax Authority (ITA). It is proposed to repeal exemption (2) commencing January 1, 2017.
Comment This means the tax exemption would continue; the reporting exemption would not. This is the third time the Finance Ministry has proposed this measure; twice it was rejected as contrary to government policy of making things easier for immigrants.
Foreign Companies It is proposed to deem foreign companies to be controlled and managed in Israel, and hence resident and taxable in Israel, if Israeli residents are entitled to 50 percent or more of profits, the tax rate would otherwise be 15% or less, and the company is either resident in a foreign country lacking a tax treaty with Israel or does not pay tax there on profits derived outside that country.
Comment This proposal may discourage the use of tax havens such as the Channel Islands, British Virgin Islands and Hong Kong and instead encourage the use of low-tax locations such as Panama, Malta, Luxembourg and Switzerland, which each have a tax treaty with Israel.
Multinational operations: It is proposed to tighten up existing transfer-pricing rules, having regard to the BEPS (base erosion profit shifting) initiative of the OECD. In particular, the ITA will be authorized to request documentation regarding the group, transactions, parties to them and transfer-pricing methodology.
In addition, groups with revenues exceeding NIS 3.4 billion (or any lower figure fixed in regulations) will need to file online a “country by country” report of group activities in each country in the relevant tax year. Failure of the group to do so will be treated as failure to file a tax return.
Comment: The OECD BEPS initiative contains far more than transfer pricing. In particular, the ITA recently issued a tax circular that seeks to tax foreign e-commerce operations if they have a “significant digital presence” in Israel, notwithstanding that this concept is contrary to Israeli and international law and was dropped by the OECD in the final version of its BEPS reports. This circular needs to be replaced by OECD-compliant rules.
Intangible assets: It is proposed to allow intangible assets to be depreciated over 10 years. But if the taxpayer has a different period of use by law or agreement, that will apply instead. The assessing officer may deny depreciation if he believes the use that can be made is not limited to any specific period. If assets and liabilities of a business are acquired, the depreciation period would be 20 years.
Comment: This is sure to be controversial as it impedes hi-tech exits unless shares of a hi-tech company are sold instead of its assets and liabilities.
Residential property: A mixed bag of measures are proposed. Commencing January 1, 2017, an annual tax will apply to the third home onward of people owning three or more homes (ownership of foreign homes is unclear). The annual tax would be the lower of 1% of the municipal-tax (arnona) value at the end of 2016 or NIS 1,500 per month.
Owners can choose which homes will be taxed, and if they don’t, the cheapest will be taxed based on data held by the ITA. Married couples will be treated as a single unit for these purposes, so will 33% or more in home-owning entity, but not homes held as inventory (for resale presumably). Also, a fast-track tax of 20% on a sale of a home is proposed, without deducting expenses except depreciation.
Finance Expenses: It is proposed to allocate finance expenses between assets having regard to their cost, period of use in the tax year and applicable tax rate(s) on income derived.
Comment: This means number crunching and new tax planning. It may be time consuming.
Profitable companies: Closely held companies, owned by five or fewer persons, may be deemed to have paid their profits as taxable salary of the office holders for personal services. Drawings of cash or use of other assets may also be taxed as salary or dividends. A separate clause proposes to extend certain of these rules to all companies, not just closely held companies.
Comment: These proposals are bad for business. Companies that show profits may lack the cash to pay extra tax, for example, if customers take credit or the company invests in fixed assets. In the past, such legislation did not work in Israel, the US and the UK among others. This is an ivory-tower proposal.
Tax correspondence: It is proposed to let the ITA move over to email correspondence only after validating email addresses of taxpayers and getting their consent.
Comment: After that, taxpayers will be deemed to have received correspondence even if the in-box is full, it went into spam, the server collapsed or you were trekking in the outback.
To Sum up: Some of these proposals are dramatic, but it remains to be seen what will be enacted and when.
As always, consult experienced tax advisers in each country at an early stage in specific cases.