Israel’s Rabbis to Lose Long-held Tax Exemption Status

The tax man, it seems, is about to cast his net over Israel’s rabbis, kabbalists, mohels, hazans and religious court judges. Blessings for a fee and vials of holy water will be subject to value-added tax and the vendor will be liable for income tax. Wedding and Torah lessons will also be liable, and the government will be taking its cut at Brit Milahs, too.

After years of ignoring tax-dodging rabbis, the Tax Authority issued a professional circular two weeks ago that outlines how tax inspectors should be collecting income tax and VAT on religious services.

Officials said that if the new policy is really enforced, it could generate hundreds of millions of shekels in revenues every year for the government.

“It’s a pity it took so long for the legal authorities to recognize that blessings, holy water or charms are a product like any other product or service, and the money that’s gotten for them – even if it’s given officially as a ‘contribution’ – should be liable for tax, like any other income,” said Uri Regev, a rabbi himself, but also a lawyer and the director of Hiddush – Freedom of Religion for Israel.

The Tax Authority has been under pressure for many years to address rabbinical tax avoidance, but under even more pressure from the religious establishment to overlook it.

The question of kabbalists not paying taxes came up as early as 1999, but the Tax Authority never published clear rules, issued a directive on how to tax religious services or sought to create legal precedents. Religious courts were not brought into the tax system and paid few, if any, taxes.

But the pressure to crack down was increased after State Comptroller Joseph Shapira published a damning report in October 2014, asserting that the tax authorities were systematically avoiding enforcing rules on rabbis, kabbalists and others providing religious services.

Shapira accused the authority of having information on money-laundering operations by 11 kabbalist rabbis and six religious courts, but failing to act.

“Most of these huge funds, accumulated by a few dozen kabbalist rabbis, are no secret. The Tax Authority has not determined clear policies yet with regard to these rabbis and the taxation of their revenues. It has not initiated a clarification of their legal status, even though the need to regulate such revenues arose 15 years ago,” Shapira wrote.

In response, the Tax Authority issued a draft circular eight months later to regional offices, outlining how taxes would be collected, and how they should be assessed. But critics doubted that officials really intended to follow up on the plan and start enforcing the tax code.

The latest circular, issued January 19, suggests that the taxmen are serious this time around. It says taxes will be levied on all rabbis and kabbalists, as well as religious courts (Badatzim) that issue kashrut certificates. Income from blessings, holy water, charms, religious articles, spiritual counseling and the like will also be liable for tax.

The rabbis will be liable for tax not just on cash payments but for gifts in kind, such as overseas travel. This will also include gifts and donations, as long as they were given in exchange for an identifiable religious service.

The world of religious commerce creates special problems for tax collectors, who have to distinguish between payments, gifts, donations and the motivations of the people making them.

For instance, a nonprofit organization (amuta) will be exempt from taxes on money it collects, unless an assessor determines that it is being run like a business. A business-like amuta would be one that is “aided by a large organizational operation, including workers and aides, and provides religious services in an organized and systematic way,” according to the circular.

“Many religious service providers have a reputation for expertise or specialization for the services they provide. In fact, they are often believed to have special qualities that attract the wider public to them to receive their services.” If so, the document advised, they should be taxed like a business.

If an amuta makes available an asset, such as a house, to a kabbalist and/or his family, the value would be liable as well. Only assets that are clearly used to provide the amuta’s services will remain exempt, the circular says.

Rabbis and others providing services independently will likewise be subject to taxes.

One problem tax inspectors expect to face is trying to determine if a gift or donation is actually a thinly disguised payment. One test, the circular suggests, is whether the payment was made close to the time that the service was provided, if the “donation” is mandatory or there’s an established norm that a payment for the service is usually made.