Poor Controls Allow Nonresident Israelis to Evade Taxes

Faulty controls encourage many to ignore the requirement to file income reports at all, comptroller says.

Israel Tax Authority offices in Jerusalem.
Lior Mizrahi

The Israel Tax Authority has failed to adequately keep track of Israelis living abroad to ensure they are paying taxes and does not always ensure that their assets are assessed before they move money out of the country, the state comptroller said in a report Wednesday.

The comptroller said the authority had failed to establish firm criteria for entitling an Israeli to be considered a foreign resident for tax purposes even though it has employed the so-called “residential” system for assessing tax, which imposes taxes on an individual’s worldwide income.

“The current tax regime and its enforcement on everything connected with income from abroad enables people in many cases to avoid paying tax not only by tax planning and using tax shelters but simply by not reporting their income at all with the knowledge that the chances that the authority will uncover their evasion are not high,” the comptroller said.

It pointed to a 2011 tax amnesty Israel offers for evaders to pay back taxes that generated 17 billion shekels ($4.5 billion) in collections.

The report said the authority had not adjusted itself to an era when many Israelis work abroad for extended periods, which made its definition of what constitutes a non-resident Israel out of date.

It cited the 2014 High Court ruling in a suit brought against Michael Sapir, who it said could be considered a non-resident even though his family lived in Israel because he worked abroad. Despite the ruling, the tax authority never updated its guidelines

Starting in the 2016 tax year, the authority is requiring all Israelis resident abroad but who spend a large part of the year inside the country to file an income report and prove they qualify as non-residents.

Nevertheless, the comptroller said the agency hasn’t developed a computerized system for deciding who are the best candidates for audits. Nor has the authority fully exploited its ability to share information with foreign tax agencies.

Israel always does a poor job of monitoring money being sent out of the country. The government doesn’t impose any tax on Israelis leaving the country, which makes it easy to launder money despite efforts to crack down on the phenomenon.

The comptroller cited figures from the authority which showed that only 71% of the 56.9 billion shekels transferred out of Israel in 2014 was approved by an assessor, since the government’s mechanism for monitoring transfers set up in 2013 is poor and its figures unreliable.

Some 1.26 billion shekels was transferred to tax shelters like the Cayman Islands, yet the average assessment on the taxes was 0.98%. Some 95% of the transfers were exempt altogether, the comptroller said.