Analysis

Who Keeps Giving Billionaire Arnon Milchan a Lavish Gift Every Year?

Each year, a mysterious hand removes an amendment that would make the billionaire and other tycoons report income to the Israeli Tax Authority.

Film producer Arnon Milchan accepting an award in New York, November 2016.
Film producer Arnon Milchan accepting an award in New York, November 2016. Evan Agostini/AP

“The exemption from reporting and payment of tax, which is granted to new immigrants and long-term returning residents under Amendment 168, is designed to contribute to aliyah and a return to Israel. However, granting a broad exemption from reporting may create an incentive to launder money or to use money laundered abroad – behavior that is liable to harm society and the economy. The State of Israel does not operate in a vacuum. It must be part of the war by countries worldwide against money laundering and tax shelters, by taking steps to increase transparency and an exchange of information.”

With these words in his 2013 report, State Comptroller Joseph Shapira determined his position on the income tax amendment that exempts new immigrants and returning residents from reporting their income to the Tax Authority.

But although the Finance Ministry and tax authorities are in complete agreement with the state comptroller, and although the treasury adds an amendment every year to the Economic Arrangements Bill (the supplementary annual legislation to the budget) to change the law – which has been dubbed the “Milchan Law” after businessman and film producer Arnon Milchan – every year a hidden hand removes the change from the draft bill and leaves the exemption in place, for the benefit of Milchan and other wealthy tycoons.

What is the state comptroller referring to? In 2008, the Knesset passed an amendment that grants a 10-year exemption to new immigrants and returning Israelis (who resided overseas for at least five years) from paying tax on all their businesses overseas and – more important – a full exemption from any reporting to the authorities. In essence, this is a law adapted to tycoons great and small.

Basically, the law states that from the moment a Jew immigrates to Israel, or from the moment a resident returns to live here, the government exempts him from any tax on his assets, businesses and income abroad, of any type: interest, dividends, payments, rent, salaries, capital gains – everything.

The law also exempts him from any contact with the Tax Authority: he doesn’t have to report anything; he doesn’t have to submit reports; and he is not required to open a file with the authorities.

Gift from the Gods

From the moment the amendment was passed, Jewish businessmen abroad and Israelis who had lived abroad hastened to take advantage of it. In itself, the law does not automatically exempt immigrants and returning residents from paying taxes in their countries of origin. Consequently, it is almost irrelevant for salaried workers, even those with high earnings. But for sophisticated businessmen who make efforts to minimize their tax payments, the law is a gift from the gods.

Why? Because these businessmen create structures of corporations and trusteeships in various tax shelters. Which means that in order to collect tax on income in the country of origin, the authorities have to carry out investigations that require international cooperation. That is the major advantage of Amendment 168: From the moment a businessman presents the foreign authorities with a document about a tax exemption, primarily an exemption from reporting, the authorities overseas understand that they won’t get cooperation from the authorities in Israel – for the simple reason that they have no such information.

In many instances, they will waive an investigation and leave the taxpayer alone. For tycoons with multiple assets, this is an amendment worth billions of shekels.

For many years in Israel, the amendment was dubbed the “Milchan law,” after the businessman who returned to Israel in 2009 (according to reports). A report on the NRG website that very year stated that the amendment had turned Israel into a tax shelter. Furthermore, the value of the benefits to be granted to Milchan would total hundreds of millions of shekels, according to estimates.

At the time, lawyer Pinhas Rubin – an expert on international tax law who focuses on services to tycoons – celebrated Milchan’s decision to return to Israel: “I’m happy that the country can be blessed with a businessman like Milchan, and people like him, who decide to immigrate to Israel. … I worked to convince the Income Tax Commission that the amendment to the law would help tycoons to return to Israel, and I’m happy it succeeded,” he told NRG.

Milchan, of course, was not the only one exploiting the law. NRG reported that real-estate entrepreneur Igal Ahouvi also used it, and those in the know report that the same is true of quite a few French businessmen.

There is no definitive answer as to why the amendment was named after Milchan. Perhaps it’s because he is the most prominent of the businessmen to have taken advantage of it, and perhaps he’s simply the most familiar name among those mentioned in the media.

At present, Milchan is familiar to the public for another reason: As the businessman at the center of the police investigation into Prime Minister Benjamin Netanyahu (called Case 1000), who is suspected of receiving gifts worth hundreds of thousands of shekels from Milchan. According to reports in Haaretz and on Israeli television, Milchan allegedly gave Netanyahu expensive cigars and bottles of pink Champagne for years, sometimes allegedly following a specific request from the Netanyahus.

Netanyahu himself – based on things he said in the Knesset and on leaked reports from the investigation room – replied to the suspicions with numerous claims, starting with the assertion that Milchan is a friend of the Netanyahu family, and that “it’s permitted to receive gifts from friends.” He also said he didn’t even know about the Champagne bottles delivered to his residence, since they were handled exclusively by his wife, Sara Netanyahu.

The police investigators are also trying to discover whether Netanyahu gave Milchan anything in exchange for those gifts. Among other things, Haaretz reported that Netanyahu allegedly worked with then-U.S. Secretary of State John Kerry and then-U.S. Ambassador to Israel Dan Shapiro, so that the U.S. administration would grant Milchan – an Israeli citizen who lives in the United States on a visa – a 10-year visa instead of the short-term visa he had.

But let’s get back to Amendment 168: In recent years, the treasury has been trying to cancel part of the exemption given to new immigrants and returning residents, because the Organization for Economic Cooperation and Development, and its member countries, are demanding that Israel cooperate in the monitoring and surveillance of international businessmen, and because of the statement by the state comptroller in the 2013 report.

Laughable claim

These are weighty reasons. Last August, the Herzog Fox & Neeman law firm published an update for its wealthy clients, explaining on its website that the reasons for the demand to cancel the exemption were “failures on the part of the State of Israel with respect to OECD investigations; difficulties in implementing exchange of information agreements with respect to new immigrants, as well as companies controlled and managed by them; difficulties in conducting effective tax audits for new immigrants; and risks associated with money laundering.”

For all these reasons, the treasury decided to include in each of the three budget books and arrangement bills in recent years a clause that cancels the exemption from reporting. The treasury does not want to cancel the exemption completely but “only” the exemption from reporting, so that the Israel Tax Authority will receive the information and, if necessary, transfer parts of it to tax authorities overseas, in accordance with OECD demands.

But every year, that same hidden hand comes and, somehow or other, causes the treasury to remove the amendment to the law at the last moment. It happened in 2013, in 2015 and in the two-year budget for 2017-2018.

Whose hand is it that year after year, budget after budget, Economic Arrangements Bill after Economic Arrangements Bill, causes the disappearance of the initiative to cancel the exemption of the need to report? We have no answer to that. As far as is known, those who oppose changing the law include the Immigrant Absorption Ministry, which claims that canceling the exemption will hurt immigration figures. In the years when the ministry opposed the change, it was headed by Sofa Landver (Yisrael Beiteinu) and Zeev Elkin (Likud).

But when we actually examine aliyah figures, the ministry’s claim seems somewhat laughable. The entire exemption is relevant almost exclusively for sophisticated businesspeople and, therefore, there shouldn’t be a huge number of people who are liable to give up on immigration to Israel due to the cancellation of the exemption. In other words, there will be no negative effect on Israel’s demographics.

So if not the Immigrant Absorption Ministry, who is quietly and effectively defying the Tax Authority and treasury, one minister after another – from Yuval Steinitz to Yair Lapid to Moshe Kahlon? The treasury knows how to look after itself and when it introduces tax changes to advanced versions of the Arrangements Bill, which it and the state comptroller demand, they don’t disappear from there without someone applying some pressure. Someone worked on it, even if we don’t know who.

On the other hand, it’s absolutely clear who benefits from the removal of the amendment from the Arrangements Bill, time after time: Milchan and other businesspeople. The Hollywood producer used the law for himself in 2009, and will continue to benefit from the exemption from reporting on his businesses until at least 2019. Even afterward, he will benefit from a partial tax exemption, based on the structured version in Amendment 168.

If the Israel Police investigates and finds that Netanyahu (or people working on his behalf) operated to remove the clause canceling the reporting exemption from the Arrangements Bill, perhaps that will add another smoking gun that will connect the gifts Milchan allegedly sent Netanyahu to what Netanyahu was supposed to give Milchan in return.