Banks fear tax reform will cause foreign residents to withdraw deposits

Income Tax authorities: Well consider changes if there is capital flight.

The income tax reform coming into effect next week is causing the banks to worry about possible capital flight by foreign residents. Under the reform, interest payments on foreign residents deposits used as collateral for credit will be subject to tax. Deposits worth millions of dollars are at stake.

Under the regulations, interest payments on foreign residents deposits in local banks are tax-exempt, unless it is used as collateral for bank credit to the customer.

Sources inform Globes that Deputy Income Tax Commissioner Oscar Abu-Razek appeared at a bank convention last night, where the banks raised their concern about capital flight. Abu-Razek said in response that if capital flight developed, the Income Tax Authority would consider changing the regulations.

In response to a question from Globes, Abu-Razek said capital flight would harm the economy, which the Income Tax Authority wishes to avoid. The Authoritys staff will consider appropriate measures if necessary, but at this stage they do not expect any damage. He said the purpose of taxing interest payments on deposits by foreign residents used as collateral for credit was to prevent tax evasion.

The banking establishment today estimated the amount of deposits used as collateral for credit at tens of millions of dollars. Most of the deposits belong to foreign businesspeople, and are used for investments and activities in Israel, mostly in the real estate and diamond industries.

Published by Globes [online] - www.globes.co.il - on December 26, 2002

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