Israel Tax Authority chief wants new taxes to narrow deficit

Eran Yaacov / Photo: Jonathan Bloom , Globes

VAT on fruit and vegetables and Netflix's mobile app, and taxing rental income are among the ways Israel Tax Authority director general Eran Yaacov would like to tackle the budget deficit.

2020 will begin this week on a pessimistic economic note. Beyond the budget deficit, which currently stands at 3.7% of GDP, compared with the 2.9% target, the state budget will spend another few hundred million shekels on the third election campaign in a year. The result is that the Ministry of Finance will have to find the missing tens of millions of shekels.

2020 is liable to remembered as the economically lost year for most government ministries, which will be hit by substantial cuts, and will probably have to renege on most of the promises made during the election campaign. The year will be governed by a continuation budget. When there is no functioning government and no possibility of passing a budget, the state's default option goes into effect - the continuation budget.

Starting on January 1, each ministry's budget will be based on one twelfth of the original 2019 budget each month or the proposed budget for next year, whichever is lower. In the next three months, the candidates for the Knesset will make a plethora of promises: better infrastructure, better welfare services, better education, and so forth, most of which they will be unable to keep.

It appears that regardless of who forms the next government, its challenge in 2020 will be adding money to the state treasury, and a lot of it. As always, here is where the Israel Tax Authority, the state's moneymaking machine, comes in. The budget deficit and the political stalemate have made the Tax Authority's job of filling the state's coffers much more challenging.

Over the past year, the Tax Authority found itself in the position of being unable to promote legislation likely to gain money for the state. At the same time, initiatives that do not require legislation also ground to a halt because of political instability and the minister of finance's inability to push through truly important measures.

This situation is making 2020, when - we hope - there will be a functioning government and Knesset, a test year, with the $64,000 question being how the state treasury can be refilled.

Speaking to "Globes," Tax Authority director general Eran Yaacov tried to bring a little order into the Tax Authority's plans and challenges in the near future, insofar as this is possible before the next minister of finance is appointed. "One of our major challenges in 2020 will be filling the public treasury without harming the developing business and economic sector, given the global change and low worldwide growth," Yaacov says. "We want to avoid tax hikes that will detract from growth. If we raise the corporate tax, it will have a severe negative impact on Israel's attractiveness and people's motivation to do business. Raising taxes on individuals is also liable to put a burden on people."

"Globes": Given the existing budget deficit, can you avoid raising taxes in 2020?

Yaacov: "Tax hikes that will damage growth can be avoided, but taxes should be raised or exemptions eliminated in the necessary places. Dealing with tax exemptions and loopholes is the right solution, for example, taxing fruits and vegetables; taxing apps that receive payment, but which are not taxed here; and there are quite a few more ideas."

The proposal to levy VAT on fruits and vegetables is not new; it has been on the agenda for over a decade, but has been shot down each time by politicians and other parties. The advocates of VAT on fruits and vegetables argue that it will add hundreds of millions of shekels to the state treasury, and will also help the struggle against unreported capital in the long term. The VAT exemption for fruits and vegetables has created a situation in which some of the parties in the fruits and vegetables supply chain did not report their income to the tax authorities. Levying VAT will make them report, thereby reining in tax evasion.

The opponents claim that levying VAT on fruits and vegetables will raise the price, reduce consumption of this essential basic item, and harm mainly the economically disadvantaged. Over the years, politicians have opposed this measure, probably in order to avoid losing important votes. The chances of imposing VAT on fruits and vegetables are probably also poor this year.

Yaacov has also been talking recently about his wish to eliminate the tax exemption on rental income up to NIS 5,000. This proposal has also been on the agenda for years, but has repeatedly failed to pass the Knesset.

The gig economy: How to collect taxes on delivery services and rides to work

Yaacov's next plan involves today's alternative markets and services. "One of our challenges in the coming year is to regulate taxation of the gig economy," he explains.

This tax challenge results from the development of the sharing economy and digital innovation. Simultaneously with the development of the sharing economy, a phenomenon has emerged that the Tax Authority calls the gig economy, which includes diverse business activities by private individuals that generate profits. Among other things, this involves various travel services, with private individuals picking up paid passengers on the road; private lessons; renting out private parking places; sales of clothing, products, and various services on the social networks; etc.

Yaacov says, "The Tax Authority is addressing this significant problem, in which many people are working for themselves by becoming peer-to-peer traders: providing private lessons, making deliveries, occasional travel services, and so on. In these cases, we have to find the formula for the dividing line between private and business. For example, the question arises of when a shared trip is a business, whether taking the neighbor to work is acceptable, and what happens when I pick up strangers on the way."

Yaacov says, "Because it is easy to make payments and manage services in the digital economy, there are many people who forget that they have to pay tax on this income. For example, people who sell dresses and clothes on Facebook, or get paid in Bit or PayBox for private lessons and forget to report. The fact that the service is sold or ordered digitally and the payment is digital does not mean that tax does not have to be paid."

International companies: Does the consumer have to pay VAT on mobile telephone Netflix services?

The digital economy is posing quite a few challenges to the Tax Authority in the coming years. One of these challenges - how to tax multinationals operating online - has been the subject of prolonged disputes between the Tax Authority and the large Internet companies in recent years. "This is an important challenge for the Tax Authority - the challenge of establishing the physical location of the economic activity (permanent establishment, E. L.-W.) of multinationals. We have been working on this for a while," Yaacov says.

When he says, "working on," Yaacov is referring to innumerable disputes between the Tax Authority and the Internet giants, including Google and Facebook, since the Tax Authority announced its intention of taxing their income in Israel from their Internet activity. "This is a global problem, and we'll emphasize it this year and try to end the existing disputes," he says.

Another taxation challenge stemming from the digital economy is establishing VAT for intangible products and services. "We are now considering the question of VAT on intangible products, for example apps downloaded to a telephone for a fixed monthly payment or a one-time payment," Yaacov says.

A typical example of this is Netflix's content services that can be consumed through a mobile phone app. Netflix currently pays no VAT in Israel on its sale of these services.

Beyond the digital economy, Yaacov also comments on taxation challenges in more conventional markets, including the auto market, in which Yaacov is planning to find a way to compensate the state treasury for lost fuel tax revenue. "We are now considering the option of taxing trips in private vehicles on the basis of the vehicle's use. The Tax Authority collects NIS 40 billion from vehicles: excise tax on gasoline, purchase taxes, customs duties, usage value, etc. There are many vehicle taxes.

"One of the new issues at a time when vehicles are becoming more electric and hybrid is the fact that the use of gasoline is decreasing, while road congestion is constantly getting worse. There are vehicles on the roads, but the tax on them is lower, because they are new age vehicles. A severe transportation problem has been created that is affecting the Israeli economy. One of the important challenges is therefore how to tax a vehicle as a function of its use, rather than as a function of its gasoline consumption, for example. This is one of the major challenges facing us this year."

The war against unreported capital

Leaving the planned new taxes aside for the moment to take up the Tax Authority's regular enforcement and collection work, the Tax Authority also anticipates challenges in this area. Yaacov explains, "Another of the Tax Authority's challenges is expanding the struggle against unreported capital and fictitious invoices. Part of the way of coping with this challenge is to build a technological system that prevents fictitious transactions in advance.

"We are currently considering development of a model in which the Tax Authority will be able to detect in advance whether each transaction conducted is legitimate, like the prevailing models for credit cards. Today, every small fry criminal issues fictitious invoices for millions and hundreds of millions of shekels. It's a national plague. It's not the Tax Authority's problem; it's an economy-wide problem that has to be addressed."

Yaacov says, "The intergenerational transition - the Y generation and the Z generation - is also a challenge for the Tax Authority, because this public wants everything to be accessible, fast, and on mobile. They want easier and more accessible tax services, and we have to advance more and more technologically speaking in order to keep pace."

In summing up his challenges for the coming year, Yaacov mentions almost incidentally the Tax Authority's wish to gain access to more information about people. This subject was a fixation of previous Tax Authority director general Moshe Asher, who sought to establish more and more databases for the Tax Authority.

Yaacov says, "We're striving to improve the Tax Authority's ability to obtain more information from the financial world in real time. In the digital era, with technological advances, apps, and big data, one of the biggest challenges facing the Tax Authority is its ability to be more focused and efficient, and to build trust among the public through data. Everything today is based on data. If I had the relevant data from all of the possible financial sources, I could reach places where there is tax evasion, subject to respecting each person's privacy.

"Obtaining the data in real time from financial institutions, financial concerns, businesses, and every possible source will bolster our ability to put our hands on tax offenders, detect the problems in real time, and, most importantly, to reach a situation in which people paying the legally mandated tax will put on special tracks and left in peace."

In the services aspect, Yaacov is setting a challenge for himself that sounds almost impossible to achieve in 2020 - a human response by the Tax Authority to people in 90 seconds. "We want to put the customer, the citizen, in the center, and to make our services more accessible, for example to have the Tax Authority provide a telephone answer within 90 seconds, and to facilitate more rapid, accessible, and extensive online tax coordination than there is now," he says.

It will be interesting to see in another year how many of the ambitious plans that Yaacov is talking about are actually carried out this year, which is beginning with the basic need of to cover a huge deficit.

Published by Globes, Israel business news - en.globes.co.il - on December 30, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Eran Yaacov / Photo: Jonathan Bloom , Globes
Eran Yaacov / Photo: Jonathan Bloom , Globes
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