Tax rules to be toughened for Israelis working overseas

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In the wake of the Bar Refaeli tax dispute, the Israel Tax Authority wants to impose a stricter definition of what constitutes residency.

In recent months, under the radar, officials have been meeting every Thursday in the conference room of Maale Hachamisha Hotel in the Jerusalem Hills in what is being called the "Committee for Legislative Amendments on International Taxation." The meetings are aimed at devising a revolutionary reform in international taxation.

The reform, the principles of which appear here, will have a far-reaching effect on many residents and businesspeople in Israel. It will affect thousands of Israelis who have relocated abroad, and  Israelis preferring to split their families, instead of joining the spouse going overseas for a prolonged period for tax reasons. The plan was devised by the Israel Tax Authority professional division. Heading the committee is Tax Authority senior deputy director general Adv. Roland Am-Shalem, CPA. The committee also includes representatives of the Tax Authority, the Israel Bar Association, the Institute of Certified Public Accountants in Israel, and the Institute of Tax Consultants in Israel. The reform requires the approval of Tax Authority director general Eran Yaacov, who will have to select what parts of it to adopt. At a later stage, it will also require a functioning government and an effective Knesset, because legislative amendments will be needed to put it into effect. It is now, however, on the agenda as part of the plans to be presented to the next minister of finance aimed at getting money for the state treasury and closing tax loopholes.

From model Bar Refaeli to famous poker player Rami Amit

In recent years, the Tax Authority has been engaged in disputes with Israelis living abroad for certain periods who did not report their income there, claiming that they were not Israeli residents.

The most famous such case is model Bar Refaeli, who is being required to pay taxes on NIS 16 million in income earned overseas over two years (Bar Rafaeli appealed this ruling to the Supreme Court, where the case is still pending). Refaeli denies the suspicions against her, and is fighting to prove her innocence. The story of late tycoon Sami Ofer's tax settlement, in which the Tax Authority withdrew its demand for payment of NIS 1 billion in tax on income earned in 2006-2009, also concerned a dispute about Ofer's residence. Another billionaire involved in a legal dispute against the Tax Authority in recent years on the question of his residence for tax purposes is Beny Steinmetz, who spent part of the year on a yacht in the open sea, thereby avoiding Israeli residence.

Rafi Amit, a poker player who won over $1 million in overseas poker games, lost his case against the Tax Authority. It was ruled that he was an Israeli resident when he competed all over the world.

The change that is now being proposed affects not only the rich and famous. It will have an impact on tens of thousands of Israelis traveling overseas to work for stipulated periods varying from a few months to a few years. It is estimated that over 20,000 Israelis relocate every year without being aware of the tax aspects of these opportunities.

Only the number of days counts in the "center of life" criterion

An Israeli resident is subject to income tax on income produced anywhere in the world, while a foreign resident is subject to tax only on income produced in Israel. The Income Tax Ordinance defines residence according to the number of days spent by a person in Israel: if a person spends over 183 days in Israel, he is an Israeli resident. A person who spends 30 or more days in Israel in one tax year and 425 days or more in the tax year and the two years preceding it is also an Israeli resident for tax purposes. In addition to this criterion, there is also a "center of life" criterion, which evaluates a person's affinity to Israel, including a permanent residence, family members remaining in Israel, business affiliations, location of assets, membership in professional and social clubs, social and economic affinities, etc. These criteria can be contradictory; in many cases, taxpayers residing more than 183 days in Israel claim that they are not obligated to pay tax in Israel, because they have severed their connection to the country. On the other hand, the Tax Authority also argues that taxpayers residing less than 183 days in Israel are subject to tax in Israel according to the center of life criterion.

The Committee for Legislative Amendments on International Taxation wants to do away with these disputes, or at least reduce their scope. What does the planned reform say? First of all, anyone who resided 184 days or more a year in Israel will be considered an Israeli resident for tax purposes. A person who resided over 183 days in Israel during a given year will no longer be able to argue that he or she is not subject to tax in Israel because he or she has no real affinity for Israel, and all of his or her visits to Israel were for business purposes or visits. It is also proposed to change the criterion of 30 days or more of residence in Israel in a tax year and 425 days of residence in the tax year and the two years preceding it to 60 days or more in the tax year and 450 days in the tax year and the two years preceding it.

Being relocated alone is not worthwhile

The most dramatic change in the reform is non-recognition of splitting the family when being relocated. The default option was for a person being relocated to take his or her family with them, thereby severing the close connection with Israel. Courts, however, previously recognized situations in which there was separate residence within the family: the father was considered a foreign resident, while the other family members (wife and children) were considered residents of Israel.

The Tax Authority is now closing this loophole. If someone relocates overseas and the spouse remains in Israel, and the person residing overseas spends at least 90 days in a year in Israel, then the relocated person is indisputably an Israeli resident. This eliminates recognition of a split family unit. Furthermore, even less than 90 days spent in Israel in a year will not necessarily make the relocated person a overseas resident.

The committee is also recommending a change in the definition of foreign resident. A person spending less than 60 days a year in Israel for three consecutive years will be considered a foreign resident. According to the current criterion, a person spending at least 183 days overseas in the first and second years and whose center of life is abroad in the third and fourth years is a foreign resident.

Differences: 50% tax instead of a complete exemption

What are the consequences of the proposed reform? Tax expert Adv. Itay Bracha says, "In many cases, the difference is between a tax exemption and paying full tax on income: 0% tax versus 50% tax on all income, and that is without double taxation, if it applies to the same person in another country that does not have a tax convention with Israel.

"Supposedly, the Tax Authority wants to provide tax certainty to taxpayers with respect to foreign residence and Israeli residence, due to the great confusion prevailing in this aspect. In practice, however, the reform makes the taxpayers' situation much worse. This is a dangerous situation. The Tax Authority is liable to do an injustice to tens of thousands of taxpayers a year."

Bracha adds, "The main negative impact will be on people relocating overseas, whose number is believed to be in the tens of thousands annually. The Israeli tourism sector will also suffer damage, because there are many foreign residents who choose to spend their holidays and summer vacations in Israel. When spending a vacation in Israel means that they will be considered Israeli residents and will have to file tax returns and pay tax in Israel, foreign residents will refrain from visiting Israel."

Ziv Sharon & Co. partner (international tax) Adv. Yoad Frenkel, CPA, former information exchanges manager in the Tax Authority's international taxation unit, says, "The planned reform is completely unbalanced, and sets illogical and one-sided criteria." He asserts that the reform runs counter to the global trend. Bracha adds, "The Tax Authority's plan clashes with the existing trend towards globalization, employee mobility, and more. In a certain sense, the reform is liable to make us backward in comparison with the rest of the world."

"Globes": Isn't certainty preferable to disputes with the Tax Authority?

Frenkel: "The reform makes the criteria more exacting in favor of the Tax Authority, without essential balances. The Tax Authority already has an advantage, following recent rulings in its favor. The Tax Authority, which is receiving tremendous backing from the courts, is nevertheless zeroing in on this matter and making the rules even more severe."

Bracha: "In this case, the effort to provide certainty is out of proportion. It's safe to say that in almost any situation, a person will be considered an Israeli resident."

In response to the arguments against the emerging reform, one Committee for Legislative Amendments on International Taxation member told "Globes," "We have to put an end to the constant disputes about residence. We saw that there was no certainty in the ruling on Bar Refaeli and in other rulings, and we want a situation in which we're creating certainty, and someone benefiting from our educational system and the good life in Israel will pay tax here."

As for the claims that the reform is too severe and one-sided in the Tax Authority's favor, especially in non-recognition of families split between countries, the committee member said, "We can't allow a person whose wife and children are in Israel and enjoying life here, the educational system, the beaches, the health system, and who spends 100 days a year here, to evade tax by claiming that the center of his life is overseas. Aren't your children your center of life? Someone who basks in the Israeli sun should be taxed for it."

The committee member adds, "We're seeing conclusive presumptions and inflexibility all over the world. We want to catch the tax evaders who don't pay tax anywhere. We want to catch those who open their accounts in all sorts of tax shelters and play with the time they spend here for the sole purpose of evading taxes… The committee is in the home stretch. We'll send our recommendations to the Tax Authority director general soon."

The Tax Authority said, "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 5, 2019

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

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