Ministry of Finance and Israel Tax Authority officials have not yet presented their position on a further tax cut to Minister of Finance Moshe Kahlon, but in informal discussions senior officials in both the ministry and the Tax Authority have expressed reservations about a reduction in indirect taxes such as VAT and purchase taxes, and say that a cut in direct taxation such as Companies Tax or Income Tax will mainly benefit the top 0.1% of salary earners.
A reduction in taxation of capital gains on securities also does not seem practical at present, despite the pressures exerted on the finance minister in this regard. The Tax Authority therefore leans towards supporting measures similar to those in Kahlon's Family Net program, of raising tax benefits for working families and young couples, although it is not clear that any tax reduction will eventually be decided on.
Advisers of Prime Minister Benjamin Netanyahu are pressing for a further reduction in Companies Tax as a response to the cut in corporate taxation in the US in President Trump's tax reform. According to "Globes'" calculations, the beneficiaries of Companies Tax reduction will be the top 0.1% of salary earners, because such a reduction will almost certainly entail a parallel reduction in the top marginal rate of Income Tax.
Taxation policy in Israel is to maintain equilibrium between Income Tax on individuals and taxation on companies and dividends. This is in order to prevent the proliferation of personal service companies as a tax avoidance measure by high earners.
Already, following the latest cut in Companies Tax to 23% on January 1, the Companies Tax and taxation of dividends track is more advantageous than the individual Income Tax track. Employees who earn more than NIS 640,000 annually will pay less tax if they set up a personal services company to receive their salaries and distribute it as a dividend at the end of the year.
At present, a salaried employee who chooses the personal services company method will retain after tax NIS 51.59 out of each NIS 100 earned annually above NIS 640,000. If such an employee pays individual Income Tax, he or she will retain only NIS 50. In the view of Israel Tax Authority officials the gap is small but still significant, and if Companies Tax is further reduced, there will be no option but to reduce the highest marginal rate of Income Tax as well, in order to dissuade high earners from setting up personal service companies. Otherwise, the highest marginal rate is liable to become theoretical only.
Kahlon has declared in the past that he will decide whether or not to cut taxes only after he sees the first quarter tax collection results. Assuming that tax revenues are higher than forecast, the question will arise whether the excess is permanent and likely to be sustained throughout the year, and substantial enough to warrant a change in the Ministry of Finance chief economist's state revenues forecast for 2018. The 2017 forecast was updated three times, because of large one-time transactions such as the $15 billion sale of Mobileye to Intel.
The tax surplus so far this year is estimated at just NIS 500-600 million. With such a negligible surplus, it can be cautiously surmised that the professionals at the Ministry of Finance and the Tax Authority will recommend against updating the tax revenues forecast and against a tax cut.
Published by Globes [online], Israel business news - www.globes-online.com - on April 9, 2018
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