The Financial Intelligence Unit receives reports of tax cheating amounting to NIS 1 billion to NIS 2 billion every year − but doesn’t do anything to address the problem because of restrictions imposed on it by the law.
Now the Tax Authority is planning to act on the problem with legislation that will categorize serious cases of tax avoidance as part of the Law Prohibiting Money Laundering. In such cases, the Financial Intelligence Unit, which is responsible for enforcing the law and receives real-time reports from Israel’s banks of suspicious transfers of money, would be able to transmit its intelligence to the Tax Authority.
While the public has been focusing on tax measures like the increase in value-added tax this month to 18%, the most important change of all appeared in a 45-page section in the draft Economic Arrangements Bill that lawmakers will vote on together with the 2013-14 budget.
At this stage it is not at all clear that the proposed law will win Knesset approval. The opposition has already eliminated two-thirds of the legislation relating to money laundering, which is now down to just 10 pages.
It was split off from the Economic Arrangements Bill after many lawmakers, among them Knesset Chairman Yuli Edelstein, expressed opposition in principle to its terms. Legislation with similar terms was brought to the Legislation Committee in the previous Knesset, then headed by David Rotem (Yisrael Beiteinu), but was never debated.
Another important piece of legislation undertaken as part of the war against money laundering that was dropped from the Economic Arrangements Bill would have required companies to reveal in their financial reports legally permissible tax avoidance measures they have taken. That information would appear in an opinion provided by the company’s counsel or auditors regarding certain sections of the financial statements. But that legislation met with strong opposition from the Bar Association on the grounds that it would violate attorney-client privileges.
After decades of underfunding, the Tax Authority lacks enough staff to cope with companies that have devised tax avoidance schemes that could be investigated and challenged. The authority even lacks the manpower to systematically examine corporate financial reports for them.
Because of its very nature − outside the law and outside official reporting mechanisms − the black market in Israel is difficult to measure.
Former Tax Commissioner Doron Arbeli estimated last year that it amounted to about NIS 40 billion. Of that, he said, 80% was due to organized crime and from so-called “aggressive” tax planning by legal businesses that skirted the law. Another 20% was tax avoidance by small businesses keeping transactions off the books.
A study by Tel Aviv University and the Taub Center estimated that Israel’s black economy amounted to 23% of gross domestic product in 2007, about the same level as Spain.
That puts it way behind the black market leaders in the developing world Italy and Greece, where it accounts for about a third of the GDP but well ahead of English-speaking countries, which have the smallest. The U.S. black economy is about 9% of GDP and Britain’s about 13%
Edelstein and Rotem contend that the legislation’s scope is far too wide-ranging to be contained inside the Economic Arrangements Bill.
“The issue of including tax law violations in the Anti-Money Laundering Law has far-reaching implications and it is best to have it deliberated in depth,” a spokesman said.
“First of all, including so many tax violations if the Anti-Money Laundering Law would add significantly to the criminal penalties imposed for tax violations, to prison terms of as much as 10 years. Secondly, it would significantly widen the number of people liable for criminal indictments even when they had no part in tax-avoidance planning.”
A third reason they offered is that it would be wrong to widen the scope of the Anti-Money Laundering Law from one dealing with the most heinous criminal activities, by organized crime or by terrorists, to encompass financial crimes that are far less serious.