"The public must realize the magnitude of the crisis. The damage to GDP and the rapid increase in our deficit due the current war, have reached the levels of two previous security and economic crises - the Yom Kippur War, and the second Intifada - combined. The post-war defense arrangements will not be the same, and that means a sharp increase in spending at 2%-1.5% of GDP, which means between NIS 30-40 billion a year. We expect an increase in growth after the war, which will bring in tax revenue, and we won’t have to take too many painful measures over time, but it’s impossible to count on that. For the next five years, we’ll need to tighten our belts."
Getting an interview with the Director of the Israel Tax Authority, Adv. Shay Aharonovich, just before the high holidays, during a war, and 2025 budget talks, is no easy task. The man helming the State of Israel’s collection machine that in recent years has also become a compensation system distributing billions of shekels to a crisis- and war-weary public, is working ‘round the clock these days. But between a meeting with the Minister of Finance, a tour of the rocket-hit northern border, and discussions to assess the extent of the damage, "Globes" sat down with Aharonovich to summarize his first year in a post received only days before our security and economic reality changed beyond all recognition.
Speaking about the Israeli economy, Aharonovich explains why the conditions imposed on the public by the Economic Arrangements Law are "the worst of the worst," tells of the new technology that exposes all Israeli citizens’ assets and funds to the Tax Authority - even if they try to conceal them. He also gives his recommendations for real estate taxes which, meanwhile, have not been accepted by the politicians, including imposing a property tax, and collecting 25% on rental income.
Aharonovich was born in Jaffa, and grew up in Rishon LeZion in a classic, middle-class, religious-Zionist family. His father was a career military man, discharged with the rank of lieutenant colonel from the IDF Communications Corps [today C4I Corps], and later worked as an electronics engineer. His mother worked in the municipality. He is the eldest of three brothers, and until the age of 17, shared a room with his brother. As a child he really liked current affairs and news. "Every morning, I would read ‘Maariv,’ and later also ‘Globes,’" he recalls.
This infatuation saw him waive being drafted into the Center of Computing and Information Systems (MAMRAM) in favor of serving in the IDF Spokespersons Unit, where most of his service was spent in Gaza. "I enlisted right at the time of the Oslo Accords, and was sent to a branch in the Gaza Division, where I served until we left Gaza in the summer of 1994. I remember what Jabalia looked like and the Rimal neighborhood, where today everything there has been destroyed," he says.
Following his discharge, he enrolled in law studies at Bar-Ilan University, and at the same time worked as news editor and legal correspondent for weekly religious-Zionist newspaper "HaTzofe." "I worked with [comedian and journalist] Hanoch Daum then, who wrote the satire section. He’s one of the biggest talents around," Aharonovich says. Later, he specialized in real estate and inheritance law at a legal firm.
He began his career at the Tax Authority in 2001, as an external legal advisor, and was later recruited into the civil service as a real estate taxation inspector, a lawyer in the legal department, director of real estate assessments, and director of Rehovot and Netanya assessment offices. In 2018, he was appointed Deputy Director of Real Estate Taxation, his last position at the Authority before being appointed its head.
There was no grace period for Aharonovich. His appointment was approved by the government on September 27, 2023, two days before the Sukkot holiday. Aharonovich was supposed to take office on October 8, 2023, but fate had other plans. "I came back from abroad on the Thursday. My brothers joked, 'Enjoy the weekend because it's the last vacation you’ll have for a while,' he relates. ‘I woke up when the sirens went off at 6:30 am that Saturday, and we’ve all been living ‘life after October 7’ since then."
Aharonovich maintains a religious lifestyle, but for the past year, has been available 24 hours a day, including Saturdays and holidays. "At a quarter to seven that day, I’d already called Amir Dahan, Manager of the Compensation Fund, and at a quarter past seven I left the house to open the Tax Authority's compensation center in Ramat Gan. On the way, I called the Rabbi of Givat Shmuel to tell him that the synagogues should be closed because Israe was in pandemonium. Since I took on this job, of course I have my cell phone open on the Sabbath. I also take it when I go to the synagogue, in my prayer-shawl case, because a tax authority director must be available and not only because of matters of compensation."
The events of October and the ongoing war since then, have put the Tax Authority’s role front and center, not only as the entity to fill the public coffers that are quickly emptying due to war expenses, but also as the entity to transfer compensation to the public for damages caused over the course of months. "The Tax Authority has entered an era never experienced before in the history of the State of Israel. The duration and intensity of the conditions is unprecedented. Both the volume of compensation, and the state's need to get funding quickly has stretched us in ways we’d never known before, and while understaffed," Aharonovich says.
The Tax Authority began the war in the wake of a massive retirement wave of its professional staff, and for some time now, insiders have complained about delays in decision-making and handling cases due to the lack of workforce. "It’s no secret that Tax Authority ranks must be reinforced, and we’re working on that these days," he says. "The Authority is no different from the rest of the Israeli economy in this regard. Coronavirus did something to the labor market, and it’s harder to find employees. Also, the economic situation and the fact that state budget wasn’t really there in 2021 eventually made a mark. In 2022, there were twice as many departures than there usually are at the Tax Authority."
How do you solve the problem?
"We appointed a committee to formulate a plan to improve the processes of hiring and retaining employees. At the same time, despite the war and the freeze on recruiting civil service employees, we were given the opportunity to hire about 500 employees, and we are in the final stage with them. I’m already working on getting another batch like this for next year. I hope that, by the middle of 2025, we’ll start to feel the ranks filling up."
In the meantime, Aaronovich makes do with what he has. "Amir Dahan's Compensation Fund department normally has 38 employees, but 250 employees have currently been assigned to it. When the war in the north is over, we’ll have to assign close to 800 Tax Authority employees per month to handle all the direct damage claims. The goal is to open claims within a few days and start handling them all quickly. I wish we could get to this point already."
To date, the Tax Authority has paid over NIS 17 billion in direct and indirect war damages compensation to citizens. "Keep in mind, there are still many damaged properties in the northern region that, due to security restrictions, we can’t reach. We estimate that at present, these amount to about NIS 1 billion," says Aharonovich.
Are there businesses or citizens from other areas who still haven’t received the payouts they’re entitled to?
Aharonovich: "95% of the claims have been paid, out of more than half a million applications submitted. There are a few thousand people who fall through the cracks, and each is a story on their own, but in practice the system works, and provides the right answer. Because if it didn't work properly, thousands of self-employed people would protest in front of the Ministry of Finance every day.
"Every day I receive several calls with personal problems of people who have not received compensation and Hanoch Daum also forwards cases to me from his help center [assisting displaced Israelis, reserve soldiers and their families]."
While compensation is the side where the Tax Authority "gives" money to citizens, its main and traditional role is to "take." During the last year, Aharonovich has discovered this role is particularly complex. "During the past year, we’ve had to deal with three revisions to the state budget in a short amount of time. We’re now in the third session of discussions over the 2025 budget," he says.
"We took measures to target the wealthier "
Just before the holidays, the draft of the chapter on taxation and the fight against black market capital in the Arrangements Law, which should be passed together with the 2025 budget, was published. It revealed a series of significant conditions and tax increases, among them, for example, freezing tax rates for three years, taxation on advanced training funds, cuts in pensions, tax on undistributed profits, reduction of tax benefits on "green" vehicles and more.
You stated in months gone by that you would try to avoid increasing the tax burden on the citizenry who today bear the brunt of it. But the 2025 budget taxation recommendations framework show you’ve moved very far away from this statement.
"Before the draft of the taxation chapter in the Economic Arrangements Law was published, I told the guys at the Authority, 'You’ll see, there will be an uproar here,' but I must explain our considerations, and the difference between immediate measures and long-term measures. The main rule imposed on the majority of the working public is, of course, the issue of a tax rate freeze, but to my mind, this is the softest thing that can be done.
"We had to take immediate steps to put money into the state coffers, here and now, and there were far more stringent proposals, such as canceling the 10% tax rate and starting with a rate of 14%, [the lowest tax rate, on income up to NIS 7,010, is currently 10%]. So, it was the best of the bad options on the table.
"I recommended freezing tax rates because it’s a measure that can be canceled as soon as the situation improves. The hope is that, as soon as the war ends, and ends in a positive way, and the hostages return, because that is part of our national reconstruction effort and must happen, then the economy will leap. I suppose that, in the end, if the US trend of cutting interest rates continues, the Bank of Israel governor will also reduce them, although we won’t go back to zero. Interest rates will go down and then the market will spring up. As soon as there’s growth, and we’ll seem to be able to bring in excess tax revenues, one of the things that can be done immediately is to update the tax rates and cancel the freeze".
But why freeze in advance for three years and not one year?
"We all hope that the situation will improve quickly, and we are perhaps more optimistic after the last week that there really are developments, but we don’t really know where things are going, and we need to state things clearly to the world. Today the State of Israel is considered a high-risk place for foreign investors and our global rating was also cut. Therefore, you need to make a clear statement for years to come."
Do the recommendations hurt pensions and taxation of advanced study funds?
"Regarding pensions, we’re talking about those with high incomes, twice the average wage in the market. And regarding advanced study funds, it should be understood that we are not damaging them. There are billions of shekels in these funds, money from people who don’t cash out their fund when it comes due after six years and benefit from the tax exemption on profits beyond the first six years of savings. So, we say that the profits on the interest beyond the six years are taxed. It’s a savings tool for six years and the benefit is tax-exempt for those years. But if you don’t cash out the fund after six years, the interest accrued from then on will be taxable."
In the past, the Ministry of Finance attempted to damage the tax benefit on advance training funds, reduce or even cancel it. Is this another step in that direction?
"I’m not currently aware of any intention to harm the funds themselves, or the six-year exemption. I’ve also tried explaining this to my friends at the Histadrut [General Organization of Workers in Israel] over the last few days. They raised the topic immediately at every single Rosh Hashana toast last week. The cancellation of the tax exemption after six years of savings is not as serious as they are trying to portray it."
Were the Histadrut members convinced?
"There are negotiations with the Ministry of Finance and I believe that, in the end, they will come to an agreement. What the public needs to understand is that we have taken permanent steps targeting the wealthier segments, and not the general public, for example in dealing with the matter of trapped earnings. Also lowering the 'Israel invoicing' threshold to NIS 5,000 addresses the war on black-market capital and will bring in billions to the state. [The mandatory requirement to report in real time on any transaction exceeding NIS 25,000]. This measure has already proven itself. The numbers show that even before we stop transactions, indirect countermeasures alone of NIS 25,000 in invoices has saved hundreds of millions for the state. Once we can thwart deals in advance, we’re certain it will bring in billions for the state."
Property taxes and rental income back on the table
The Economic Arrangements Law hides a blanket clause for "advancing matters stuck in the finance committee". Concealed within this section is an initiative the Tax Authority has long been trying to promote: establishing a database of renters. The Authority has attempted for years to pass legislation that abolishes the tax exemption for rental income up to a ceiling of NIS 5,654, or at the very least obliges apartment owners who rent them to report the rental, even if the income is below the exemption threshold.
These initiatives were included in the Economic Arrangements Law in recent years, but time after time, were blocked by the political echelon. The 2024 budget included an initiative to establish a database of rental unit owners. However, the initiative was split into a separate legislation when discussions began, and has been stuck in the finance committee ever since. "As part of the Arrangements Law 2025, we wish to advance the obligation to report rental income that was held up in the finance committee," explains Aharonovich.
Over the years the politicians have held you back. Why would things change now?
"In our situation, with a deep deficit and security needs, I estimate that the members of the government and the members of the Knesset will understand there is no alternative. Our assumption is that if there is reporting on the rental market, it will bring over a billion shekels into the state coffers because suddenly people will enter the tax network, and then we may not have to carry out measures that burden the working public. Remember that I come from that same sector. I really feel the pain of the working person and the self-employed. So, by taking some bold measures, it will be possible to bring in money from other areas."
What about property tax on vacant land? You expressed support for bringing that back return, and its currently not being promoted.
"There is a committee appointed by the Minister of Finance to examine this. In recent weeks, we’ve frozen that task, due to intensive work on the budget law and the Arrangements Law, but it will be back. We definitely see this as another source the state needs when seeking a permanent increase in tax revenue. I estimate that towards the beginning of December 2025, we will submit recommendations to the minister."
In January 2025, the purchase tax rates will drop from 8% to 5-6% and there is currently no law that maintains the existing rates.
"A few months ago, we submitted to the Finance Committee an order to extend the existing tax rates for another two years. In my estimation, it will pass in the end because I don't think anyone now has the desire to encourage even more investors to return to the market. The ball is in the housing policy court, the politicians’ court, less so in the Tax Authority’s."
"By the way," adds Aharonovich, "In my opinion, it would be better to establish a 25% tax on rental income and lower the purchase tax. The OECD has told us this several times in the last 15 years, and I think it is also better to have a tax on rent, the way it is on dividends and capital gains in the stock market, the way it is on some of savings plans."
"We should consider abolishing the NIS 200 bill"
During the budget discussions, a proposal was raised to abolish NIS 200 bills, with the aim of fighting black-market capital and generating additional income. The proposal included a plan under which those holding NIS 200 bills could convert them at banks while explaining their source and paying tax if required. However, the Bank of Israel quickly poured cold water on the proposal. To date, Aharonovich had not commented on this but now reveals that, behind the scenes, he supported the proposal.
"I think that we must think outside the box in the fight against black-market capital, and canceling the NIS 200 bill, to my mind, is kind of out-of-the-box. 60-75% of the money in circulation is in NIS 200 bills. In enforcement operations against criminals and crime families, both in investigations and repossessions, we catch a lot of unreported money in cash and it's almost always NIS 200 bills.
"Europe stopped printing €500 bills in 2018 and Switzerland canceled the 1000-franc bill, which has implications that could help greatly in the fight against black-market capital. This would have ‘moved the cheese’ for those accumulating these bills in cash. Why should a person keep bundles of NIS 200 cash notes at home? I believe this proposal will be examined in the future, and it should be linked to a voluntary disclosure procedure so that people will want to disclose their capital without fear of criminal charges. But at the moment the Bank of Israel has spoken."
Where did the voluntary disclosure go? You stated months ago that you are starting a new voluntary disclosure procedure.
"It didn’t disappear. Voluntary disclosure is not easy. We are currently in discussions with the Attorney General regarding what happens to those whose requests are rejected and the consequences. In previous times, over 90% of these requests were accepted, but we need to refine what happens when they are not. Right now, both we and the Attorney General’s team are overtasked, but I very much hope that during the holidays or immediately after we will publish the new voluntary disclosure."
You also said this before Pesach and its now Rosh Hashanah.
"True, but it’s better to release something that will achieve the desired results, rather than release a directive that won’t achieve them, and will have to be rectified later."
"The more we improve, the more people won’t want to mess with us"
Despite the war and the deep budget deficit, Aharonovich has not abandoned the plans he had when he came into office. "On my agenda, within two years, the Tax Authority will be fully computerized," he says. "Since the Tax Authority will not be able to reach everyone, and it will not grow at the same rate as the population, and will remain around 5,000-6,000 employees, similar to today, then a large part of activity should be handled by technological means, together with our smarter risk management."
The plan to turn the Tax Authority into a technology-driven entity was initiated by his predecessors, Moshe Asher and Eran Yaacov, and Aharonovich has continued pursuing vigorously. Today he unveils, for the first time, a new AI-driven tool that the Authority is piloting. "It's a tool that today provides, in two seconds, all the business and personal connections and all the assets of every ID card holder. We used to need two intelligence researchers and two investigators who would sit on a case like this for two months, and they wouldn't have gotten everything either."
The Tax Authority’s IT systems are not known for their advanced technologies.
"Arie Rimini, CEO of Computerized Processing Service (SHAAM) [the Tax Authority IT division] conducted a huge project to unify all the computer systems of all the departments into one large data pool, after which you can begin manipulating all this information."
Big Brother in the Tax Authority.
"These are definitely very dangerous tools that give a lot of power, so we provide access to this tool sparingly, and not to every employee or supervisor. Today, you can immediately know the entire financial record of a person, then with the click of a button compare it to his reported income and assets, and check instantly whether there’s a need to collect a debt from him, and if there are any red flags.
"This year we were allocated NIS 100 million that was earmarked for this, over and above our regular budget, and we will receive it in 2025 as well. This tool will actually be the best answer to the streamlining the Authority must undergo. Today, we check 1.2% of the cases at best. Our goal is for 100% of assessments to be checked first by computer for suspicious signs, after which Authority personnel can check those files where problems are really noted.
"Another thing we’re looking into for 2025 is applying a type of 'virtual inspectors,' meaning that a machine will check the files and do a basic audit. We will always need the workers to take the big files that raise tax-related questions, but this will be a huge breakthrough in collecting and fighting black-market capital."
What is the biggest challenge today in the fight against black-market capital?
"It's a constant, daily struggle, but there are degrees. There’s 'soft' black-market capital, which is what we see day to day in the way the public pays private tutors, beauticians, repairmen. We all know the plumber who tells you how much the price is in cash, and how much it is not in cash, and the fact is they are sometimes paid under the table. A large part of their income is reported, but a portion goes unreported. I estimate that by applying the Reduction of the Use of Cash Law, 'Israel invoices' and intelligence and auditing technologies we’re consistently introducing, it will be possible to greatly reduce soft black-market capital. The more our capabilities improve, the more people will opt not to mess with us, and will declare all their income."
What about "heavy" black-market capital?
"The heavy black-market capital is a shadow economy of crime families, fictitious invoices, a cover for drug and protection activities, and requires far more aggressive treatment. We need to continue to strengthen our relationship with the police, and do more actions and operations in this sphere. We have several joint operations planned for after the holidays."
So how do you sum up your turbulent first year in office?
"Before I took office, I used to say that every tax administrator has some kind of war or pandemic, or economic crisis over a five-year period. But I never thought I’d have them all happen together on my first day in office. But as a human being, I believe there’s a reason for being in a certain place. That being said, it was a challenging year, but on the other hand, it was also a year where I feel I’m benefiting the Israeli economy, the Israeli public and the State of Israel, and I feel privileged to be in my position during this time.
"The importance of the Tax Authority today is no less than our defense arrangements. Customs guard the borders and makes sure that no foreign currency passes through and that trade continues. Without the compensation fund, the economy would collapse. I hope we will be able to implement and realize many more things in the coming year for the benefit of the country."
Published by Globes, Israel business news - en.globes.co.il - on October 8, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.