During a conference held this week by the Deloitte & Touche - Brightman Almagor accounting firm, it was evident that senior accountants and lawyers overwhelmingly support the tax reforms recommended by the Rabinovich Commission. Members of the panel, who also serve as tax advisers in the private market, such as attorneys Gary Agron, Pinhas Rubin and Udi Barzilai, attempted - each in his own field of expertise - to explain to those present the latent advantages of the commission's recommendations.
Partners in Brightman Almagor also highly praised the reforms, emphasizing that they would not harm their livelihood and would give them much more tax planning and advisory work.
One of the firm's partners even said with half a smile that there were loopholes that could be used to evade paying a lot of taxes, but to prevent those loopholes from being closed during the ongoing legislative process, he preferred not to go into detail.
However, economists and other senior businessmen, like Sam Bronfeld, Amiram Sivan, Yehezkel Flumin, Danny Goldstein and Amos Mar-Haim, objected to many clauses in the proposed law that they feel will be more detrimental, than beneficial, to the economy.
Flumin: Finance Comittee conduct disgraceful
"The increased number of taxation rates and tracks can be used by accountants to plan [or launder] taxes," said accountant Zvi Friedman, who heads the tax department at Brightman Almagor. He noted, for example, that a person could transfer a losing security from one of his accounts to another and offset the capital gains of another security. On the other hand, since payments are made when a security is sold, there would be an incentive not to sell securities that have paper gains. Friedman noted that it was his duty as an accountant to find the tax loopholes.
"As someone who has ventured into the private market and needs advice on how to narrow the gap between gross and net income, and after listening to the scholarly lectures, I see that I will have to ask the lecturers privately about better tax planning," said Amiram Sivan, former CEO of Bank Hapoalim, commenting on the increased work load for accountants.
Flumin, an attorney who was a former deputy finance minister, said the reforms are not wise and provide no real contribution to the economy. He said that a few people in the treasury are obsessed with passing the reforms, and the pressure is palpable in the Knesset Finance Committee. "What's happening in the Finance Committee is disgraceful," he said. "It is unreasonable that reforms so complicated should be discussed by the Finance Committee at only four or five sessions."
Flumin added that MKs cannot keep up with the many amendments that the committee continues to add to the bill. "Over 60 amendments have already been added on each of three occasions," he said. "The income tax commissioner is trying to slip in clauses that would not be passed were they not included in the reform package." Flumin said the amendments are of utmost importance, but no one is divulging any information on them and no one is being consulted.
Sivan said the reforms are a political move by Finance Minister Silvan Shalom, who needs to reduce transfer payments. Sivan said that Shalom has supported increasing transfer payments, but is trying to show there is a balance and that the treasury is also taking from the rich. According to Sivan, the monetary value of the reforms is insignificant compared to income tax and value added tax, or when compared to the state budget. He added that levying a volume tax on the capital market in 2003 will have a most negative effect.
Sam Bronfeld, director of the Tel Aviv Stock Exchange who is renowned for opposing a volume tax on the bourse, directed his criticism primarily at the treasury's public service TV advertisements, calling them a false representation. The ads try to create the impression that the reforms are a tax on the wealthy, but, in fact, the tax will apply to public savings plans. Bronfeld noted, for example, the owner of the Mercedes car in the ad, who says he lives from the bourse, while the poor owner of the Subaru pays taxes. "Show me someone who lives off his stock market profits," said Bronfeld.
Rubin: Good intentions may lead to damage
The Rabinovich recommendations greatly reduced the legal options for avoiding paying taxes on overseas investments. After the recommendations are passed into law, only one option will remain for investing overseas without paying taxes on profits - the establishment of a trust. A trust is an irrevocable trust company whose written regulations include the names of the beneficiaries of the company's profits, and in future, also the principle investment. Often the founder is the only beneficiary. "It's likely that where we tried to do good, we ended up doing damage," said Rubin, regarding the higher tax that will be paid on profits abroad compared to those in Israel. He said that after all the loopholes in overseas investments were closed to favor the local capital market, the gap in taxation rates on income from here and abroad will take a few years to close.
"Even so, now not only will [some investors] not pay the 35 percent tax on profits from foreign securities, they won't even pay the 15 percent on profits from local securities," he said. "There are some very creative ideas about how not to pay any taxes."
Rubin said that it was so easy to avoid paying taxes overseas that there was no need for trusts. "Everything we knew has changed," he said. "Now everyone owes taxes on their overseas operations, so trusts have become relevant. Other speakers said that investments via trusts will become more common.
"Trusts will not be taxed in the foreseeable future," said attorney Hanan Nitzan of the tax department at Deloitte & Touche Israel, adding that tax legislation for trusts will take years to formulate because first the Trusts Law would have to be altered and only then would tax laws be adapted to it. Nitzan said the tax authorities accept that trusts will not be taxed, but the requirement to report a trust's activities deters people. "Thus the authorities reduce the number of trusts being established without taxing them," Nitzan said.
A trust is a separate entity set up in a foreign country, so it cannot be taxed in Israel. Large companies such as Merrill Lynch and HSBC manage hundreds of thousands of trusts around the world. The beneficiaries do not pay tax on the profits, since the payments are defined as gifts and not as dividends. Nitzan said that the cost of establishing and managing a trust make it feasible for the investor interested in transferring funds overseas to do so via a trust only if the sum is over $100,000.
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