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A dispute concerning the handling of exemptions has arisen between the banks and the Income Tax Authority in ongoing talks on the implementation of the tax reform.

The planned reform grants tax exemptions to low-income earners and pensioners. However, the banks claim they don't have the means to divide exempt clients from the general public, proposing that tax be withheld on interest payments on savings plans and deposits and that those entitled to exemptions receive tax returns from the Income Tax Division.

The executive director of the Association of Banks in Israel, Freddy Wieder, confirmed that the matter of handling exemptions had not been resolved. "We have explained to Income Tax that banks do not manage taxpayers' finances, but the bank accounts of our clients. We do not know how to manage an exemption procedure, and we feel the Income Tax Division must handle the matter," Wieder said.

The banks do not want their clerks functioning as tax collectors and discussing taxation matters with clients. They fear that taxing savings and the tax calculation method will cause contention with clients, despite the fact that the banks only fulfill a technical role in collection. They are also concerned that clients will flood clerks with tax questions that bank clerks will be ill-equipped to answer.

Wieder reported that one method under examination was that the Income Tax Division would locate persons entitled to exemptions and report them to the banks. The banks would then locate those people's savings accounts and report the ownership structure, interest payments made and the tax rate withheld to the authorities. The Income Tax Division would then determine if those clients were entitled to a return. Wieder said there was still no final agreement on the method.

Wieder noted the banks were concerned that transmitting data about clients to the tax authorities violated the banking confidentiality principle and would make many clients' accounts transparent. The banks are also discussing a system for securities tax collection with the Income Tax Authority.

The recently-ratified tax reform determines that a 0.5 percent turnover tax will be collected on securities transactions in the first half of 2003, rising to 1 percent in the second half of next year. Beginning in 2004, there will be a 15 percent capital gains tax on effective gains. Wieder said this would raise questions regarding sources of tax information for bank clients.

"Clients have the right to reporting and proper disclosure on every shekel collected from them. Banks do not have tax experts and it seems impractical to place such experts in every branch of every bank in Israel," he said.

Wieder believes the simplest solution to the problems is to initiate a general reporting requirement.