Leumi Didn't Collect Capital Gains Tax on ETFs Due to Computer Glitch

Wrote to investors advising them they owe 15% tax

A computer glitch at Bank Leumi, Israel's second-biggest bank, has cost the state treasury hundreds of thousands of shekels. However, the taxman will be coming to call.

Due to the glitch, throughout the year 2005, the bank failed to collect capital gains tax for the state when investors sold units in ETFs (exchange traded funds).

The tax in question is 15% of their capital gains. By the way, from 2006 they will owe 20% on capital gains, but that is not relevant to the Leumi problem.

Tax parity kicked in on January 1, 2005. Until that time, gains from selling foreign securities had been liable to 35% tax and gains from Israeli securities, to 15% tax. From the start of 2005, capital gains tax was leveled at 15% - but the bank never collected it at all, when clients sold ETF units.

Leumi has written to the clients in question, advising them of the glitch and warning them that they owe tax.

(From 2006, taxes on various forms of securities was raised by 5% to 20%, depending on the form of security but not the gains' country of origin.)

The ETFs in question were not  issued by Leumi itself: under the rules of the Bachar reform of the banks and capital market, it can't write securities.  They can however issue ETFs indirectly through affiliated companies. In Leumi's case, that would be Psagot Ofek, for instance. Bank Discount handles such matters via Tachlit Discount.

The banks sell ETFs issued by specialized firms. The biggest in Israel are Excellence-Nessuah's KSM unit, which sells 20 forms of ETFs; Clal Finance Batucha unit Mabatm which sells 10 different types of ETF; and Bank Discount's Tachlit, which offers 11 sorts.