Israel Lets Most Private Firms That Fail to Submit Tax Reports Off the Hook

The law requires corporations to submit annual reports on their revenues to the Israel Tax Authority. However, a new study reveals that more than a quarter of private companies failed to do so between 2006 and 2010, and that offending firms avoided punishment for their failure to comply with the law 92% of the time.

The study, conducted by the Rishon Letzion-based College of Management and examining compliance by 135,000 incorporated entities based on the Tax Authority’s own data, found that 27% of the private businesses had failed to comply with the law.

Initially, the authority refused to provide the information for the study. It later agreed to provide the data but demanded 40,000 shekels ($11,400) in payment to assemble the required information. The agency ultimately agreed to cut the fee in half, and the parties also agreed that the names of the firms would not be provided, although information about the nature, location and size of the companies would be.

The researchers found that, during the period reviewed, offenders were subjected to administrative fines in only 3.1% of the instances in which companies failed to submit their annual revenue reports. In addition, investigations in advance of the possible filing of criminal charges against the companies was only opened in 4.5% of the cases.

The reporting is particularly important in the long run for tax collection purposes, because, absent the reports, the Tax Authority cannot properly determine the amount of tax the companies owned. For its part, the Tax Authority said the issue of the imposition of administrative fines has recently been under review and its work plan for this year includes substantially increased enforcement efforts – including the issuance of summonses to those who fail to submit reports and increased fines.

According to the findings of the study (which was edited by faculty member Eli Or, who is an accountant and lawyer), about half of the private companies failed to comply with the reporting requirement at least once during the period examined. Compliance was worst in Arab communities and among privately held Israeli companies in the West Bank.

The law requiring annual reporting was passed in 1985 and provides for criminal penalties for violators of up to a year in prison, a year’s probation and a fine. Nonetheless – at least in the years studied – large numbers of companies failed to comply. The study deemed firms to be in compliance if they submitted the reports within three months of the date on which they were due.

The data provided by the Tax Authority, which was current as of February 2013, found 22,797 cases in which companies had not submitted annual reports for any of the five years from 2006 to 2010. Only 4.4% of them were subjected to administrative fines, while 8.1% had criminal investigations opened. Only half of companies who had failed to submit reports during the five-year period did so the year after they were fined. And 42% of the companies that had criminal investigations opened still failed to submit the required report the following year.