Amnesty update and OECD review of Israel

It has been a busy week in the Israeli tax world this week.

IAmnesty update

t had to happen. On February 13, the Israel Tax Authority (ITA) published Operating Instructions (5/2018) regarding the 2018 Israeli tax amnesty program. But the instructions “recommended” that advisers sign a declaration in an annex that they have verified taxpayer income and capital by reference to documentation. This is tricky because documentation in amnesty cases is often incomplete. And the annex required income to be totaled in a way prone to errors. On March 6, the ITA reissued the operating instructions with no need for the annex or any declaration by advisers, pending consultation with professional bodies.

Comment: We raised these issues and many more with the ITA. Watch this space.

OECD review of Israeli economy and taxation

The OECD published a major economic survey on Israel on March 11. In summary, the OECD said the economy is strong. Income inequality has fallen, but economic disparities and a lack of social cohesion persist. The OECD said this refers to low living standards of the haredi and Arab communities. Reforming education, infrastructure and product markets would enhance “inclusiveness,” according to the OECD. The OECD said it is worried that bursting property prices may trigger a recession.

On the tax front, the OECD report is a bit contradictory. For example, to better accommodate the country’s economic and social needs, the OECD thinks a spending-growth ceiling of the existing fiscal rule should be raised. On the other hand, since 2017’s deficit decline is temporary – thanks to Intel’s purchase of Mobileye – permanent tax cuts or unfinanced spending increases would inappropriately weaken the medium-term fiscal position in Israel.

The OECD recommends repealing a range of tax breaks: zero VAT on fresh fruits and vegetables; tax breaks for “study” funds (kranot histalmut); residential rental income below NIS 5,000 per month; tax breaks for company car purchases; and tax breaks in Eilat.

On the enforcement side, the OECD recommends: annual tax returns for all; “digitalization” of the tax system; reducing the number of tax payments required; and a unit dealing with large taxpayers.

The OECD even raised the possibility of giving the ITA access to individuals’ banking data.

The OECD supports Israel’s adoption of the OECD Base Erosion and Profit Shifting (BEPS) project to protect the corporate tax base and automatic exchange of financial account information between tax administrations.

Strangely, the OECD does not applaud Israel for making 2017 tax breaks for industry and hi-tech fit in with BEPS. Instead the OECD recommends “paring back” such targeted incentives in exchange for cuts in the rate of corporate income tax.

On the environmental side, the OECD says air quality in Israel is poor, well below the OECD average, and problems of overexploitation of water persist. The OECD wants Israel to make polluters pay by shifting from purchase tax on vehicles to taxing their use, e.g., by fee-based reserved-lane systems, urban congestion charging and other environmental levies.

Regarding real estate, the OECD reports that a “welcome” property tax on owners of three or more dwellings was adopted in 2017 until its invalidation by the High Court of Justice last August for procedural reasons. The OECD says this tax is expected to be adopted in the “next Knesset session.”

What about the nascent gas sector? The OECD notes that in addition to royalties and corporate taxes, the gas industry will be liable for a special gas levy of 20% to 50% on profits over normal returns on investment, whose proceeds will be placed in a sovereign investment fund to share with future generations. It could represent 10% of GDP in 2040 and will be invested in foreign currencies to reduce the risks of “Dutch Disease” (excess appreciation of the shekel).

Comments

The OECD apparently makes no specific recommendations about repealing the 10-year tax holiday for foreign income and gains of olim and returnees. On several occasions, the ITA has initiated proposals to curtail or repeal the tax holiday, claiming the OECD opposed it. That claim now looks hollow.

The policies proposed for the haredi sector seem political more than economic in nature and may not be popular or well-timed. The OECD support for tax on owners of three or more dwellings may not be appreciated by many landlords, tenants and property investors. As for the attack on incentives for industry and hi-tech, many people credit these incentives with helping to propel Israel’s phenomenal development since the 1950s.

The report does not quantify the amount or timing of gas taxes. These will presumably provide future Israeli governments with a useful revenue boost, but what will they do with it?

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

leon@hcat.co

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