The Israel Tax Authority is distributing largesse amounting to billions of shekels in the form of tax exemptions and benefits to investment funds, while lacking any legal authority to do so, according to a report published today by the State Comptroller. Among other things, excessive tax benefits were granted to Apax Partners without any comparison of the benefit and contribution of the fund's investments for the economy with the cost of the benefits. Apax Partners is referred to in the report as "Fund A," and the report states that it is considered one of the world's largest investment groups. An examination of the particulars shows that Fund A is in fact Apax, and the report is referring to its profit on the Tnuva Food Industries Ltd. deal.
No special laws have been passed in Israel governing taxation of investment funds, and for this reason, the tax rules established in the Income Tax Ordinance for taxing individuals and partnerships ostensibly apply to these funds. These rules apply to a variety of tax aspects, including income tax on the funds' activity, taxation of dividends and interest received by the funds' partners, taxation of the profits distributed to the partner who manages the fund's business, and VAT on the activity of the funds and their managers in Israel. Under the Income Tax Ordinance, the Tax Authority head is authorized, in accordance with the requests reaching him or her, to render taxation decisions and draw up tax agreements with the funds. The law also forbids "granting tax discounts and concessions" to taxpayers other than by law or under authority defined in the law.
The State Comptroller found that from the 1990s to the present day, the Tax Authority head has been using Section 16A of the Income Tax Ordinance, which grants him "authority to reimburse tax to a foreign resident," not as retroactive reimbursement for a foreign tax that was paid, but to render precedential tax decision granting tax concessions to investment funds and foreign investors in those funds, including an exemption for profits, interest, and dividends. The State Comptroller alleges that these concessions were granted without any explicit authority in the wording of the law.
The State Comptroller wrote that in the framework of using this "tax reimbursement" section, tax benefits were granted over the years aggregately amounting to billions of shekels. In addition, in its precedential taxation decisions, the Tax Authority granted benefits that did not fulfill the threshold conditions established in its own regulations. In many cases, the conditions in many of the tax decisions contradicted the threshold conditions. The State Comptroller added, "A tax concession set solely according to judgment, without defined and uniform criteria, is undesirable."
Published by Globes [online], Israel Business News - www.globes-online.com - on October 25, 2017
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