State Comptroller Judge (ret.) Yosef Shapira is publishing a special section of his annual report today dealing with the Israel Tax Authority's policy on tax planning. He stated categorically that the Tax Authority's handling of tax planning and tax loopholes was allowing tax evasion amounting to billions, and that its handling of these cases was taking too long.
In contrast to dramatic statements in recent years about stepped up enforcement and deterrence by the Tax Authority against tax planning, the State Comptroller found that the Tax Authority's handling of tax planning, among other things by compiling a list of tax planning requiring reporting, was unsuccessful. Among other things, the Tax Authority has not updated its list of tax planning requiring reporting since 2006. This list provides no response to all the subsequent developments and innovations in tax planning, is inadequate, and does achieve the purpose of the legislation - drawing the Tax Authority's attention to the existence of tax planning - to the greatest possible extent.
The State Comptroller also wrote that the Tax Authority had not managed to deter aggressive tax planning. It did not enforce the tax regulations and punish the tax planners, and was unable to provide figures for the proportion of taxpayers evading reporting on aggressive tax planning.
The State Comptroller stated that the Tax Authority's deterrent capability in the framework of its struggle against aggressive tax planning had been eroded, among other things because deterrent measures were not being taken against taxpayers who do not report tax planning. Among other things, the law stipulates that if a taxpayer files a report without a mandatory description of his tax planning, the tax assessor is entitled to impose a NIS 500 fine on him for each month in which he did not report his tax planning. In addition, in order to make aggressive tax planning less worthwhile, sections were added to the law imposing a fine amounting to 30% of the deficit created by an action classified as tax planning in the return.
Shapira found, however, that the Tax Authority was not imposing fines on tax planners for failing to make the required reporting of tax planning in their returns, and was also not imposing deficit fines. "The Tax Authority must enhance its enforcement and obedience to the provisions of the law in order to verify that violators do not benefit," he wrote.
No coordination between tax agencies
The State Comptroller also found that the work plans of the investigations and intelligence division did not emphasize dealing with aggressive tax planning. As a result, none of the 10,682 cases opened in 2012-2014 concerned failure to make the required report of tax planning in a tax return. Shapira cited an example of a company processed by the national tax assessment unit. This example showed that the company did not report tax planning totaling NIS 6 million in its return for 2007-2010. The tax assessment office gave this information to the central district investigations office in April 2012. The case was returned, and in May 2012, at the request of the central district investigations office, the supervisor who handled the case sent additional information to the tax assessment office for the purpose of handling the case with additional investigative information. Although this information was communicated, no case for failure to report tax planning was opened.
Shapira found that the Tax Authority had not developed its capabilities for detecting tax planning, because the tax assessment office and the VAT offices made almost no use of the tax planning computer system, and "in practice, this system, which was supposed to be a tool for regular work and management served no purpose." He added that there was no reconciliation between the two databases for improving the tax data requiring reporting.
Shapira also wrote that the link between the various tax systems the income and land tax, customs duties, VAT, and computer processing service departments was not in order, and "in the absence of proper handling of the transfer of information between the systems about transactions, including tax planning, there was no coordination between the various tax systems, and this was liable to detract from tax collection."
"The level of enforcement for Israeli taxation of overseas income makes it possible to evade taxes"
Addressing the subject of taxation of Israelis' overseas income, the State Comptroller stated, "Enforcement of the tax regime in Israel depends, among other things, on the Tax Authority's ability to deal with the growing overseas business activity by residents of Israel. It appears that in many cases, the current tax regime and the level of enforcement in all matters pertaining to taxing income from overseas makes it possible to evade paying taxes not only through tax planning and the use of tax shelters, but simply by not reporting income, in the knowledge that the chances that the Tax Authority will trace the tax evader are not good."
Shapira commented on the vagueness of the criteria for considering which persons are regarded as a resident of Israel for tax purposes. The question is relevant for many Israelis relocating overseas, wealthy people moving to a different place, and many others.
Under the Income Tax Ordinance, an Israeli resident is subject to income tax on income produced anywhere in the world, while a foreign resident is subject to income tax only on income produced in Israel. The definition of residence in the Income Tax Ordinance is based on a test of a person's "center of life," which examines the person affiliations with Israel. Another test for determining residence is the days test, according to which a person spending over 183 days in Israel is considered a resident of Israel for tax purposes.
The question of residence has led to many disputes between the Tax Authority and Israelis who have moved to foreign countries and lived there for certain periods without reporting their income there, while claiming that they are not residents of Israel. One example is the criminal investigation of Israel's leading model, Bar Refaeli, after the Tax Authority alleged that she had falsely told it that she had resided overseas for years, while the Authority said that she had actually lived in Tel Aviv. The Authority alleged that Refaeli had in this way concealed millions of shekels in income.
The tax settlement of late billionaire Sammy Ofer, in which the Tax Authority withdrew its demand for NIS 1 billion in taxes on Ofer's income in 2006-2009, also revolved around a dispute concerning Ofer's place of residence. Another billionaire involved in litigation against the Tax Authority in recent years is Benny Steinmatz, who decided to live most of the year on a yacht at sea, thereby avoiding residence in Israel.
Between Google and Facebook
Another topic coming under Shapira's microscope is the Tax Authority's policy on the tax liability of international companies operating in Israel through the Internet. For the past two years, the Tax Authority has labored to formulate tax rules for multinational corporations operating in Israel through the Internet. In April this year, a final Tax Authority circular was published containing guidelines for taxation of the international Internet companies operating in Israel. According to the circular, multinational corporations like Google, Facebook, Amazon.com, and others operating from Israeli territory will pay corporate tax.
The State Comptroller, however, found a lack of clarity in various matters in the circular, leading to tax disputes with many taxpayers. It also emerged that many foreign companies with extensive online commercial activity in Israel were not even registered with the Israel Tax Authority. "Due to the importance currently attached in the world to dealing with faults in the international tax system, a window of opportunity has been created for leveraging this in order to address these faults in Israel," Shapira writes. "One of the faults to be addressed is diversion of profits to tax shelters by multinational companies, resulting in payment of low taxes or no taxes at all in Israel. These actions have a negative impact on competition, because companies acting in this manner are giving themselves an advantage over companies that operate primarily in Israel."
Shapira also pointed out that the Tax Authority had no regular policy on collecting VAT from multinational companies operating in Israel through the Internet. He also found that the Tax Authority had not published a guideline for all the businesses functioning as suppliers for multinational Internet companies clarifying to which transactions with these Internet companies 0% VAT would apply.
Tax Authority: Our actions against illegitimate tax planning have generated billions
The Tax Authority was not happy with the State Comptroller's report, to say the least. Tax Authority sources believe that Shapira had ignored its laborious work and achievements in recent years, and had written a slanted and popularity-seeking report that did not reflect the actual situation.
The Tax Authority's official response was even-tempered, but the system's dissatisfaction with the report was clear even in this response. The following are the main points of the Tax Authority's response:
* The Tax Authority has dedicated itself to the struggle against unreported income and illegitimate tax planning. A major proportion of its work in recent years was devoted to closing loopholes and combating improper tax planning through legislation, publication of taxation decisions, and professional circulars; tax assessments, and also through the courts. Tax collection in recent years from differences in tax assessments, following monitoring of income tax averaged NIS 11 billion a year, with an absolute majority of this amount resulting from actions taken against tax planning.
* The Tax Authority has also initiated legislative amendments, and has closed up dozens of loopholes in the tax laws. These amendments have generated additional aggregate tax revenue estimated in the hundreds of millions of shekels. These amendments include amendments to the Income Tax Ordinance ending the tax loopholes for a "family company," in the taxation model for trusts, in taxing the distribution of a dividend from revaluation profits, closing a tax loophole in the foreign-controlled company model and the foreign-based professional services company model, and more. The peak of this work was the legislative amendment requiring reporting of the use of an opinion or taking a stance contradicting the official position of the Tax Authority.
* Many other amendments initiated by the Tax Authority were not put into legislation because of the heavy load in the Knesset and the Knesset Finance Committee. Nevertheless, the Tax Authority is determined to promote the proposals in the pipeline. In the framework of the priorities in legislation and the given to the Tax Authority by the Finance Committee (given the change in governments and the focus on the Economic Arrangements Bill and the budget), the Tax Authority gave priority to promoting legislation closing more significant tax loopholes over legislation highlighting existing planning.
In its response, the Tax Authority also commented on the taxation of overseas residents of Israel, writing, "The Tax Authority has made many efforts in recent years aimed at enhancing enforcement of the tax law and increasing the level of compliance by Israelis doing overseas business that is taxable in Israel. Among other things, the recent voluntary disclosure procedure has been a resounding success. 5,700 citizens to date have arranged their tax affairs, paying hundreds of millions of shekels in taxes to date. Most of the income reported is overseas income of Israelis (mainly bank accounts).
"In the sending of letters to citizens concerning whom suspicious signs of unreported income were found, emphasis was also placed on detecting unreported overseas activity, and letters were sent to many thousands of residents of Israel on overseas flights not in the framework of their professions. Sending the letters to this group contributed NIS 233 million more to the state treasury (out of the total of NIS 900 million collected as a result of this measure).
"The Tax Authority conducted an investigation that led to the exposure of bank lists of Israelis with accounts at USB Switzerland, an affair that led to the filing of initial indictments. Later, following intelligence efforts, the Tax Authority obtained a list of Israeli customers with accounts at HSBC Switzerland, and arrests were made of those suspected of non-reporting. Intelligence efforts also led to the exposure of the particulars of thousands of Israelis owning companies in Panama and other tax shelters, and those suspected of failure to report were also arrested in this case."
Published by Globes [online], Israel business news - www.globes-online.com - on November 1, 2016
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