Israel Tax Authority director Doron Arbeli has for the first time ever come out in favor of instituting mandatory tax filing by the entire population.
In doing so Arbeli has reversed the authority’s traditional stance opposing universal tax reporting.
Arbeli, who is soon to step down and just last week submitted the report by the committee he heads on fighting the underground economy, told TheMarker that the extent of tax evasion in Israel makes drastic steps to improve the situation imperative.
“Moving towards mandatory universal reporting is such a step,” he said.
Arbeli estimated that the unreported income in Israel equals 7% of the gross domestic product, or about NIS 60 billion, representing NIS 10 billion to NIS 12 billion in lost tax revenues. This is a conservative estimate compared with that of the World Bank, which puts it at 23%, orabout NIS 200 billion.
Moreover, Arbeli said the trend is growing, not shrinking. He therefore asserted that the Tax Authority’s approach to requiring tax filings must change.
For years the authority has objected, claiming it would involve tremendous bureaucracy with little to show for the effort. Businesses, the self-employed and wealthy wage earners are already obligated anyhow to file income tax reports, it contended, and the effort invested in collecting reports from the entire population is therefore unnecessary.
Only effective measure
This is why Arbeli’s committee didn’t recommend universal filing but left the question open for later.
While Arbeli said he now categorically supports the move as the only effective measure for strengthening deterrence against tax evasion, he suggestsed delaying the implementing it until work is completed by another committee that he recommends establishing to develop an automated risk management tool.
The system would help the tax authority identify suspicious reports needing to be examined.
The customs department is already using risk management software, according to Arbeli. It maps out all of Israel’s import licenses, 1.3 million a year, and recommends individualized inspections in 5% of the cases. In each of these cases inspectors open the shipment to examine it. The software is becoming increasingly more sophisticated in identifying risks, claimedArbeli, as attested to by the rate of customs seizures rising from 15% to 40% of all examinations performed.
Arbeli said he wants to establish a similar system for income tax that will point out which filings need to be thoroughly checked.
“There’s not enough manpower today so I only check a few percent of the reports,” he admitted. “If the entire population files tomorrow the percent I check will be miniscule, so instead of improving deterrence by making reporting mandatory we’ll only reduce deterrence. I therefore need to efficiently allocate my workforce through a sample checking of reports, with the sampling based on risk analysis.”
He added that such a risk analysis system for income tax filings is already under development.
Setting up this system is just one of the recommendations by Arbeli’s committee. The tax authority arranged for an additional NIS 100 million a year in its budget to augment its workforce by 750 on top of its existing 5,000 positions, and to invest in technology like risk management to improve its collection and intelligence capabilities.