The Israel Tax Authority is considering closing the emigration tax loophole in order to increase tax revenues and narrow the budget deficit.
Two weeks ago, "Globes" revealed that the "Committee for Legislative Amendments on International Taxation" was working on a reform in international taxation. Among other things, the committee recommended to Tax Authority director Eran Yaacov making the criteria for severance of residence stricter for Israelis leaving Israel and seeking to terminate their tax liability in Israel. The reform in residency criteria will have far-reaching effects on thousands of Israelis being relocated overseas and on their tax liabilities.
It now emerges that the committee has set another goal for itself - an emigration tax. When people relocate overseas or permanently emigrates from Israel, the state is entitled to a "payment" of part of the profits that they will make from the sale of the assets that they accumulated when they resided in Israel.
Many of those leaving Israel do not know this, and the Tax Authority has not really managed to enforce this legal provision giving the state a share of the assets of Israelis who emigrate. This is because in many cases, former Israelis did not report that they had left Israel, and certainly did not later report the sale of the assets they accumulated when they still lived in Israel.
The Tax Authority wants to get its hands on this money, and to make sure that former Israelis will pay the tax due to the state even after they no longer live in Israel.
How will the Tax Authority accomplish this? This question is currently at the core of a fierce dispute on the secret committee formulating dramatic legislative amendments in the realm of relocation and international taxation.
An old and never applied law
An emigration tax, also called a exit tax, is anchored in Section 100A of the Income Tax Ordinance, which levies a capital gain tax on people relocating overseas or emigrating from Israel and ceasing to be residents of Israel. The tax is imposed on a "notional tax event" in which the assets of an emigrant are considered as though they were sold before he or she left Israel. An exit tax is designed to provide a solution for a situation in which an Israeli resident outside Israel who holds assets outside Israel becomes a foreign resident and sells the assets only afterwards, and consequently has no tax liability in Israel, because the seller is a foreign resident, and the asset is not in Israel.
The purpose of the exit tax is to tax the profit made by former Israelis from the asset before their residence in Israeli was severed. Taxation of this kind is common all over the world; it is not an Israeli invention, but there is a problem with trying to collect it in Israel.
The law gives Israelis who leave an option to defer payment of the tax until the date on which their assets are actually sold. This deferment is necessary, because the people being relocated or emigrating do not always have large liquid assets with which to pay the Tax Authority, and also because of the possibility that the people involved will return to Israel before selling their assets, or that the value of their assets will fall far below their value when they left Israel, in which case there is nothing on which they need to pay tax.
That same consideration for Israelis leaving the country became a big problem for the Tax Authority, however, because once they are no longer residents of Israel, they have no reporting obligation in Israel. Many emigrants do not report the sale of the assets they held when they were residents. They are not obligated to report that they left, and do not have to report what assets they own when they leave Israel.
The Tax Authority lacks both personnel and means for chasing after everyone all over the world to find assets belonging to Israelis when they left and discover whether those assets have been sold and when they were sold.
Declaration of capital and registration in trust
The Tax Authority wants to close this loophole. Part of the solution will include a new reporting duty that will require Israelis going overseas to submit a declaration of capital with a list of all their assets at the time. The committee members, however, are having trouble agreeing on an overall complete solution for this tax loophole and what guarantees will be required from residents who leave.
For example, the committee discussed the idea of requiring residents who leave to transfer their overseas assets to trusts, and to obligate the trust to report the sale of the assets in Israel. This idea was opposed by the committee members from the Institute of Tax Advisers in Israel and some committee members from the Israel Bar Association. The opponents assert that the proposal constitutes crude interference in the activity of people who are terminating their residence by requiring them to bear expenses (payments to the trustee) and to obtain approval from the trust for every action taken with their property.
Other ideas raised are the deposit of a bank guarantee, listing a caveat in favor of Israel in the land registries of foreign countries, deposit of a personal guarantee, registration of collateral, and so on. All of these ideas, however, aroused opposition and problems.
The discussions are now focusing on a proposal by the representatives from the Institute of Tax Advisers on the committee, according to which only people whose total overseas assets exceed NIS 5 million will have to report and provide guarantees for their assets to the Tax Authority when leaving.
Institute of Tax Advisers president Yaron Gindi says, "We are strongly in favor of changing the law on the exit tax. The law exists everywhere in the world for people who sever their residence, and also in Israel. Only because of the difficulty in implementation and the absence of enforcement tools is the law is the exit tax not levied on those who leave. At the same time, proportionality must be maintained."
The Tax Authority said in response, "Given the global changes that have taken place in recent years, the Tax Authority management believed that it was fitting to examine international tax policy and legislation for the purpose of adapting the law to the current era, and most importantly, creating certainty. For this purpose, the Tax Authority formed a committee to examine the matter. Since the committee has not yet formulated and submitted its recommendations, discussion of the matters in question is premature and futile."
Published by Globes, Israel business news - en.globes.co.il - on November 18, 2019
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