Why Tax Shelters Are un-Zionist

You call it tax planning, I call it tax evasion. Bibi, you listening?

Prime Minister Benjamin Netanyahu had no known connection to the largest of the Channel Islands south of England when he opened a personal bank account there about 10 years ago. With its gray English weather, the prime minister would probably not have chosen Jersey as a vacation destination. Nonetheless, some of the income he earned from 1999 to 2002 found its way to a bank account there, with no evident explanation other than Jersey’s very low tax rates.

Over the weekend, the prime minister argued that he had no need to make use of Jersey as a tax haven because during the years in question, Israeli law did not require him to pay taxes on income generated outside of Israel.

It’s certainly possible that Netanyahu chose the tax shelter out of a desire to reduce his tax obligations to a government other than Israel — the United States, for example — but should that temper our disappointment over what he did?

It’s not terribly important whether the prime minister, who was a private citizen in those years, made use of Jersey’s tax laws to reduce his tax liabilities to Israel or to another country. By the same token, it doesn’t matter that the German corporate pyramid of Moti Ben-Moshe, one of the new controlling shareholders of the IDB group, is registered in exotic tax havens like the Virgin Islands and Cyprus, apparently in an attempt to reduce the corporate tax it pays in Germany.

In the same breath, one might mention Israeli billionaire Teddy Sagi, who not only made his fortune from Internet gambling (he founded gaming site Playtech in 1999) but registered his company on the Isle of Man, the British crown possession that has little to offer other than low taxes, and later in Cyprus.

Roll of dishonor

There is an entire roll of dishonor of people who have found themselves doing business in the most exotic locations on earth, and not because they got lost. They did it to reduce their tax obligations to the authorities where the income was generated. It doesn’t matter whether that is Israel, Germany, Britain or the United States. It still involves reducing the amount of tax they owe - or, as professional jargon would have it, “tax planning.” That’s a particularly elegant euphemism, of course, obscuring the reality that this kind of tax planning is nothing but a cynical, if often legal, evasion of taxes that deserves to be condemned.

Granted, Israeli business tycoons and politicians were not the ones to invent the system. It was actually the world’s largest companies that turned tax planning into an art form. At the end of 2012, for example, Google reportedly shifted $9.8 billion in revenues, about 80% of its pre-tax total in 2011, to a company registered in Bermuda. In the process, it is said to have reduced its American tax liability by about $2 billion.

It’s not clear what operations Google has in Bermuda, but it seems obvious that the beautiful little Atlantic island doesn’t account for 80% of Google’s global business. What appears to be a massive diversion of Google’s profits to Bermuda, mostly from Western Europe via subsidiaries in Ireland and the Netherlands (tactics known as a “double Irish” and a “Dutch sandwich”), has sparked investigations into the company in Western Europe and Australia. Apple was also the target of a U.S. congressional investigation after it became apparent that it had recorded 65% of its profits in Ireland (which offered the company a 2% corporate tax rate), although only 4% of Apple’s workforce is there.

Nearly all of these investigations end with a whimper. Last year Google paid just $55 million in taxes in Britain, even though it derived $4.9 billion in revenues from the country. In the meantime, the British parliament made do with a reprimand. And therein lies the nub of the problem: Somehow, multinational companies have managed to turn a cynical use of tax shelters into what is regarded as tax planning.

As distinguished from tax evasion, "tax planning" is considered legitimate, a way to make use of existing global tax laws, rather than violate them. Of course, it’s absurd in practice. Nobody suspects that Google, for example, derives $10 billion in revenues from its Bermuda business activities. It’s clear that this involves diverting profits from Western Europe to avoid European taxes. But for whatever reason, this multi-tentacled system through which Google has channeled profits from Britain, via Ireland and the Netherlands to Bermuda, is considered legitimate.

Tax laws are national

According to Moran Harari, the director of the Israeli branch of the Tax Justice Network at the College of Law and Business in Ramat Gan, it’s not global tax legislation that creates the current situation. No one can dictate where multinationals register their intellectual property, and no one can stop Google if it registers intellectual property developed at a Google R&D center (in Israel, for instance) on Bermuda.

“Tax laws are currently national, and if the U.S., for example, wishes to challenge Google’s registration in Bermuda, it needs to prove that it involves artificial tax planning," says Harari. "To do so, it would need to show that every stage of the tax planning was artificial. Since the United States doesn’t have the data from all of the countries that the recording of the revenues goes through, it doesn’t have the ability to prove it.”

The Tax Justice Network, an advocacy group based in London, is lobbying countries around the world to cooperate on uniform tax rules in a bid to close just the type of loopholes Google and other big multinationals, including Apple, have been exploiting. For the time being, progress is scant. No country relishes sharing corporate tax and revenue data, and tax havens such as Ireland, the Netherlands, Singapore and Switzerland are trying to head off any such effort at global tax enforcement. Since a global legislative effort is required for real change, Israel cannot do a thing to help advance the issue and is, for the most part, dragged along in what is happening elsewhere.

Nonetheless, Moran Harari, together with Meretz leader Zahava Gal-On, is promoting legislation that would require multinationals that operate in the country to disclose financial data such as revenue, number of employees and tax payments in all the countries in which they operate, so that attempts to divert profits can be uncovered. Not surprisingly, a bill that would require such disclosure in Israel is encountering resistance.

The Israel Securities Authority is opposed because as it stands now, such a law would apply only to publicly traded companies. The securities authority says that is discriminatory and that closely held firms should be subject to the same requirements. Some government officials say a law that would require companies to report income and tax payment could chase away companies such as Intel’s local subsidiary. At this point, Israel is making no legislative effort to prevent the use of tax havens by multinationals that conduct business in this country.

But at least revised local tax laws closed the loophole that made it possible for individuals (apparently including Netanyahu, until 2002) to make use of tax havens.

In the absence of active efforts against companies that avoid paying their fair share of taxes through the use of tax havens, we can at least expose their deeds. The time has come to state clearly that those who use tax havens are avoiding paying their obligation to society. Even if it’s not against the law (and that’s unfortunate), use of tax shelters means misuse of corporate funds, since companies engaged in this type of tax planning are depriving the countries in which they operate from enjoying the fruits of the companies’ investments. The poor end up having to pay more taxes as a result. Such conduct is nothing other than despicable and unpatriotic - and in Israel, un-Zionist - and should be condemned. Benjamin Netanyahu, take note.

Eyal Toueg