Official Fog Shrouds Granting of Tax Deductions to Israeli NGOs

Even after the system was ostensibly reformed, the process of awarding tax-exempt status to non-profit organizations remains far from transparent.

Israel Tax Authority offices in Jerusalem.
Lior Mizrahi

When Israelis give money to non-profit groups, the receipt they get back often contains a lot of small print about the contribution being “approved under Section 46.” People usually ignore it, as they do all fine print, but behind it is serious money, some 300 million shekels ($79 million) a year in tax credits for philanthropic contributions.

Under the terms of the Income Tax Ordinance, a person donating 180 shekels a year or more is entitled to a credit amounting to 35% of the donation. Companies making donations earn a 25% credit.

The credit is an important tool for fundraising, but TheMarker has learned that only a small number of non-profits get it and the criteria for how it is awarded remains shrouded in mystery even after reforms have been put into place to make the process more transparent.

The Tax Authority has never made public a complete list of Section 46 organizations, so that anyone wishing to donate has to do a lot of legwork. But TheMarker obtained the list after filing a request through the Freedom of Information Law. It includes 5,904 non-profits, less than one third of the 21,000 entities listed as “public institutions.”

According to information obtained by TheMarker, over 1,000 requests have been made in the last there years to approve such status. The list includes about every cause and interest group imaginable, from neighborhood synagogues to the Jewish Agency, religious organizations, universities and colleges.

The list includes Yad Vashem, the Antiquities Authority, the Yitzhak Rabin Center, the Peres Center for Peace, the Adam Institute for Democracy and Peace in memory of Emil Greenzweig, the Association for Civil Rights in Israel, the United Jewish Appeal, the Jewish National Fund, various Friendship associations, research agencies, charity groups, sports clubs, the Institute for Research, Study and Construction of the Temple, Yad L’Achim, the Hebron College, Regavim, the Center for Perpetuating the Legacy of Gush Katif, and the Efrat non-profit group which encourages Jewish births.

Few Arab NGOs

The list is notable for the paucity of Arab institutions – just 45 are listed, including Sakhnin College, the Nazareth Fund, the Baka al-Garbiyeh College and a group promoting Arab theater. All told, Arab groups constitute less than 1% of the list.

Citing privacy issues, the Tax Authority would not divulge which groups were rejected for Section 46 status or not renewed.

The organizations with Section 46 status have been deemed as operating for the benefit of the public, meaning they are performing services the government would have to do if a non-profit weren’t there to do it instead. On the other hand, awarding tax credits reduces government revenues so the state has an interest in making sure they aren’t used excessively.

The finance minister decides which groups get Section 46 status, subject to approval by the Knesset Finance Committee. But in practice, the Tax Authority makes the decisions with help from the Registrar of Non-Profit Associations.

The opaque process governing Section 46 eligibility was severely criticized by the High Court of Justice, so in 2013, then-finance minister Yair Lapid appointed retired judge Sarah Frisch to head a committee to examine the process. The committee recommended that the Tax Authority establish clearer criteria and a one-year time limit for handling applications. Importantly, it widened the scope of “public” goals to include groups assisting Israelis living overseas, engaged in humanitarian work or disseminating information about Israel.

Last August, the Tax Authority published new Section 46 guidelines based on these recommendations. It added some new criteria, such as that top salaries paid by non-profit groups couldn’t exceed those of directors general in government ministries, and rules on how their budget surpluses could be invested. More public representatives were added to the committees that vet applications.

The authority says waiting times for approval have been drastically cut, with increased transparency and easier access through its website.

“The committee’s recommendations were positive and progressive, especially in expanding the targets of assistance, but implementation remains the sore point,” said Lior Finkel-Perl, the head of the Israel CivicLeader Association, an umbrella organization of non-profits. “Legislation has stalled since the last government fell and there is no new initiative. The list of public causes has not been updated, even though that was a key recommendation.”

The authority claims that political considerations are no longer taken into account, but it won’t divulge the identity of groups that were turned down, which makes it hard to independent verify its claim. The authority still has some leeway for refusing an application, such as when a group counters “state values.”

This is relevant for two groups that were denied approval in the last 18 months – Rabbis for Human Rights, and Physicians for Human Rights. The common thread is their activities in the occupied territories.

Last year the Tax Authority denied a Section 46 request by Rabbis for Human Rights based on a claim that some of its activities “don’t benefit the residents of Israel.” The group, established in 1988, defines its goals as “preventing and repairing violations of human rights and bringing Judaism to public awareness, as a basis for social action.” In the 1990s the group received an award from the Knesset speaker for its contributions to advancing the rule of law and democratic values, protection of human rights and fostering of tolerance.

Of the group’s four sections, it appears that it was those dealing with land and human rights of Palestinians living in the territories that got the organization rejected.

Doctors denied

Physicians for Human Rights were denied a renewal of their Section 46 status, which it had held for a decade, after it refused to divulge personal information about aid recipients on the grounds of patient confidentiality, among others. But the problem only seems to have surfaced after the Tax Authority expressed reservations about the political nature of the group’s activities and its failure to comply with public aims as defined by the law.

This group works with Bedouin living in non-recognized villages in the Negev, prisoners and detainees in Israel, migrant workers and asylum seekers, and residents of the territories. After an exchange of correspondence and a meeting with the Tax Authority, PHR is awaiting a review of the earlier decision. If it is turned down, it vows to petition the High Court of Justice.

The current media confrontation between Breaking the Silence and Im Tirtzu underscores the problem of interpreting criteria and guidelines. The traitor-baiting, anti-leftist Im Tirtzu has been approved under Section 46, while the leftist Breaking the Silence didn’t even apply, assuming it would be rejected.

Dr. Nissan Limor, the head of the Institute for Civic Responsibility at the Center for Academic Studies at Or Yehuda, said he believes the Tax Authority’s considerations are professional. The question is whether it’s consistent.

“I assume that with the given guidelines civil servants act professionally. The court is authorized to interpret the law and anyone can appeal it if they consider themselves wronged. I suggested while serving on that committee that the guidelines be made clear, not left as an internal Tax Authority document, so that the status is set in a way that enables a court to take a stand.”

Limor worries over the fact that politicians – the finance minister and the Knesset committee – are the ones giving approval under Section 46. “There’s no parallel elsewhere. In other countries there are rules, and civil servants carry them out. I suggested legislating these rules so that the responsible treasury official can handle it without political intervention, just as income tax officials know how much tax to impose without the need for further approval.”

The Knesset Finance Committee usually approves the list of non-profit groups it gets after this is approved by the Tax Authority. In one exception last August, it refused to approve the Messianic Jewish organization Yahad in Ramat Hasharon, after it had been approved by the Registrar of Non-Profits and the Tax Authority.

“The state can’t assist non-profits that operate counter to the law or ones that undermine the state’s foundations,” said committee chairman MK Moshe Gafni (United Torah Judaism). “If we approved it we’d be encouraging donations for missionary activities that undermine the Jewish character of our state. Any group that contravenes the law will not be approved under clause 46.”

Limor said that “granting approval depends on whether the group adheres to the rules. The treasury defined these rules so I don’t understand the further consideration by the Knesset committee. The registrar registered the group and the tax authorities examined it. If someone violates the law this should be examined, but not by the Knesset committee. The whole system is crooked and must change.”