Next year is shaping up to be a difficult one for Israel’s treasury. The deficit is way above target and growing, and a new government won’t be in place before November to amend the 2019 budget and/or approve the 2020 spending package.
In the words of Eran Yaacov, who heads the Israel Tax Authority: “2020 is going to be a fiscally complex year.” Worse, tax revenues have been coming in under target this year, even as spending grows.
The hands of Finance Ministry and tax authority officials are tied in terms of dealing with the deficit until the next government is formed, but they’re already hard at work on new revenue-boosting measures including tools for stepped-up enforcement of existing rules.
Like any new tax measures, they’ll stir a lot of opposition, but given the fiscal constraints the next government faces, at least some of them will be enacted. The losers include new immigrants, denizens of the gig economy and global internet companies.
The following are three of the main initiatives that the taxmen have in mind.
Attack the Milchan Law
The law, named after Israeli-American Hollywood mogul Arnon Milchan, has never been a favorite of the tax authority because it facilities money laundering and tax evasion. The law exempts new immigrants and returning Israelis not only from paying taxes on all passive and active income earned outside of Israel for the first 10 years in the country, it also exempts them from filing a tax report.
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The tax authority has tried at least three times to rescind the filing exemption. It will try again for 2020 for a fourth time, and it has another amendment planned that would prevent abuses.
The proposal would take back half the 10-year exemption from new immigrants or returning Israelis who leave the country when their exemptions expire. In other words, the tax authority would demand five years of back tax filings and payments.
Proponents face two obstacles; one is from the Immigration and Absorption Ministry, which is a stalwart defender of the law in its entirety. The other is implementation; tax officials will have a difficult time recovering back taxes from people who have left the country.
The bottom line is that the odds of the amendments winning approval aren’t particularly good, nor is it clear what kind of tax revenues Israel would collect from the proposed changes anyway.
Guilty until proven innocent
The cabinet and Knesset over the past year have debated various steps to help the tax authority tackle evasion. Some were adopted, but officials are now hoping to put one particularly controversial measure back on the agenda.
The measure would authorize them to demand from financial institutions, such as banks and insurance companies, information on large groups of clients based on predetermined criteria, but not necessarily because they believe that any tax laws were violated. Tax investigators would then pore over the data looking for infractions.
In 2015-16, legislation like this was debated and then shelved. The bill defined the kind of data the tax authority would be seeking as “red lights” – for instance, multiple instances of large cash deposits into a bank account, or transfers topping 100,000 shekels ($27,600 at current exchange rates) to a recognized tax haven.
Lawmakers and the legal adviser to the Knesset Constitution, Law and Justice Committee said the bill constituted a severe infringement of privacy and other rights.
This time, officials will argue that any violations of privacy will be proportional to the issue involved. But they also plan to seek authority to obtain information from nonfinancial institutions like Amazon and Airbnb, and digital payment providers like PayPal, whose data today is not available to them.
The bottom line: The odds of approval aren’t high. The extra taxes that would be collected are difficult to estimate.
A piece of the whale
For several years, Israel’s tax authorities have struggled with how to collect taxes from the world’s internet giants on their Israeli activities. Officials are now in negotiations with some of the multinationals over tax assessment, but they haven’t reached any agreements and the companies may end up turning to the courts.
Currently, when companies like Google or Facebook collect money from Israeli advertisers or Amazon gets paid by Israeli companies for its cloud computing services, they’re not liable for taxes. The internet multinationals – most of them American – book their revenues from Israel in a third country and book the profits in a fourth one, where tax rates are the lowest.
One way to get around the complications of taxing far-flung businesses is to impose a tax on turnover rather than on profits. The rate would be much lower, below 10 percent, and would save Israel disputes with other countries about what share of taxable profits each one should be getting.
As that suggests, Israel’s problems aren’t unique for developed countries, and the Organization for International Cooperation and Development is determined to help, if for no other reason than it makes sense for countries to employ a single system.
Last Friday it announced that 129 countries and territories had endorsed a 40-page program laying out options to revamp countries’ rights to tax foreign companies and set a global minimum corporate tax rate. The next step is to narrow down the options and to have the outline for a global deal by January so that the remaining details can be hammered out for a final agreement late next year.
The annual potential for tax revenues for Israel is in the hundreds of millions of shekels, perhaps even 1 billion. The short-term prospects for collecting is medium to low, but the long-term prospects are much better.
“There is now an international consensus recognizing that our tax rules are no longer adapted to the 21st century,” French Finance Minister Bruno Le Maire, a strong supporter of the overhaul, told OECD leaders.