Israel Tax Authority could target returning Israelis

Lone passenger at Ben Gurion Airport  / Photo: Reuters
Lone passenger at Ben Gurion Airport / Photo: Reuters

The Israel Tax Authority has dismissed an OECD recommendation not to tax people relocating during the Covid-19 crisis.

The Ministry of Interior estimates that about 75,000 Israelis have returned from abroad since the coronavirus outbreak began after an 'extended stay' out of the country. Some of them had relocated overseas but now back in Israel continue to work remotely for their companies.

The OECD has said that such citizens should continue to pay tax in the countries in which they are permanently resident rather than their native countries where they have sought refuge. However, sources in the Israel Tax Authority have told "Globes" that the OECD has only made a recommendation and has not related specifically to the individual tax laws of each member country. The sources also said that the recommendations are for people 'trapped' in a particular country and not those who have chosen to spend the Covid-19 crisis in a different country.

The first wave of returning Israelis came from China and Hong Kong at the start of the year. Subsequently Israelis started streaming in from Europe and then the US. With the skies now closed and few flights out of Israel, most of them will remain in Israel until the crisis ends, whenever that will be.

According to Adv. Yoad Frenkel CPA, partner international tax at Ziv Sharon& Co. law firm and the former head of the International Tax Department at the Israel Tax Authority the aim of the OECD's recommendation was to ease the tax burden for individual residents and company residency and create a permanent establishment for taxation of salaried employees.

Regarding such a permanent structure, explains Frenkel, "The employers expressed concern that their employees in the countries where they are forced to stay might create a permanent establishment for their companies."

A "permanent establishment" is a fixed place of business which generally gives rise to income and VAT liability in a particular country. The accepted rule of thumb in tax covenants is usually the location of an office for 183 days per tax year or the operation of an agent dependent on the source country. There are countries, of which Israel is not one, that have defined for themselves "permanent establishment" and have set a lower required presence or that the tax is not included in the covenant such as taxes in individual US states), and the OECD is encouraging these countries to set legal relaxation following the coronavirus.

In this context, the OECD sets that if an employee works from home, then that home won't be seen as a permanent establishment of a foreign venture because the home is not at the disposal of that foreign venture.

Frenkel points out, "There is a decision of the Israel Tax Authority, which contradicts these instructions, which says that the home of an employee can be a permanent establishment for a foreign employee. According to the OECD, the decision that the home of an employee is not a permanent establishment is now given validity. People are working from home because of government instructions and we are talking about 'force majeure' and not the demands of the employers. Therefore, working from home does not set up a permanent establishment for the employer."

Another question that the coronavirus crisis brings up is regarding effective control and management of a company when the CEO or other senior executives are forced to live abroad. According to the OECD, as the crisis has created exceptional and temporary circumstances, these circumstances should be neutralized when examining the location of the control and management of a company during this period.

The OECD document also related to taxation of individuals, and when it is possible to tax a resident of one country for their income from another country. The OECD calls on the country of residency and the country of origin in which the employee worked before the virus crisis and the country of forced residency - to cooperate in order to neutralize the influence of taxation. In other words, the OECD is seeking to prevent double taxation and a 'war' for the tax on an employee's income.

The definition of a 'resident' for tax purposes is somebody who spends more than 183 days per year in the country, or more than 425 days over a three-year period, or at least 30 days in the current tax year.

Alongside the 'number of days' test there is the 'center of life test,' which includes various criteria including permanent establishment, where the family lives, social connections, the place of a business or employment, the whereabouts of assets, membership of professional organizations and more.

The OECD is currently saying that a 'forced stay' of a person should not influence their residency status for tax purposes. The OECD refers to two types of situations. The first where a person was abroad on work or vacation and was left stranded in that country. The second is where a person returned to their country of origin from the country where they were working and a tax resident. The OECD argues that in both cases, an individual should not be regarded as a resident of the country they find themselves in due to the coronavirus.

Frenkel says that contrary to the UK, Ireland and Australia that have published instructions that agree with the OECD definition, the Israel Tax Authority has remained silent in line with its 'closed hand' policy to the self-employed and businesses in general during the crisis. Frenkel feels that as Israel is a member of the OECD, the Israel Tax Authority should fall in line with the OECD recommendation.

"The Israel Tax Authority said, "The publication by the OECD secretariat represents a type of guidance to countries on applying covenant instructions, and is designed to provide tax authorities and the state's qualified authorities if needed, and to our understanding does not obligate changes in the laws of countries. There are two alternative tests for being an Israeli resident: the center of life test, and the numbers test, which examines the number of days in Israel during the year. For those who voluntarily returned to Israel, as opposed to those who are trapped here without the ability to leave the country, the OECD publication is completely irrelevant and our answer is that every taxpayer will be examined according to their circumstances."

Published by Globes, Israel business news - www.globes-online.com - on April 23, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Lone passenger at Ben Gurion Airport  / Photo: Reuters
Lone passenger at Ben Gurion Airport / Photo: Reuters
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