Analysis

The Law That's Plaguing Netanyahu – and Driving the Tax Office Crazy

Tax breaks for new immigrants and returning Israelis may have been crafted to benefit Hollywood mogul Arnon Milchan, a key figure in 'Case 1000'

Hollywood mogul Arnon Milchan (center) with actress Angelina Jolie and actor Brad Pitt, July 19, 2011.
reuters

The recommendation by the Israel Police to indict Prime Minister Benjamin Netanyahu in two corruption cases has shined the spotlight on the so-called Milchan law, which gives new immigrants and returning Israelis a 10-year exemption on reporting and paying tax on income earned outside Israel.

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Milchan is Rehovot-born Hollywood mogul Arnon Milchan, a key figure in the “lavish gifts” affair in which Milchan and Australian billionaire James Packer allegedly gave Netanyahu 1 million shekels ($283,000) in things like cigars and champagne over years. It raises the question of whether there was a quid pro quo, making the gifts a bribe.

The prime minister insists that this largesse was nothing untoward, but the police say the Milchan law is just one of a number of benefits that the prime minister provided in return.

The story of the Milchan law began in early 2007, when a policy overhaul gave new immigrants and returning Israelis who had lived abroad for a considerable period the 10-year exemption. This applied to both active and passive income, whether from the sale of assets or investments or from other ongoing income derived overseas.

The Milchan law was passed by the Knesset in 2008, when Ehud Olmert was prime minister (someone who himself has done prison time on a corruption conviction). The head of the Israel Tax Authority at the time was Yehuda Nasradishi, and the man who pushed the legislation through was Pinhas Rubin, a lawyer who represented Milchan and other wealthy businesspeople. Milchan is just one businessman who returned to Israel following the passage of the law.

>>  Police say Netanyahu received gifts worth 1 million shekels ■ In return, he assisted Hollywood producer Milchan with tax breaks, his U.S. visa and his media interests ■ In a separate case, Netanyahu promoted a media mogul's interests in return for positive coverage >>

The leader of the opposition Yesh Atid party, Yair Lapid, told the police that while his party was in the government and Lapid was finance minister, he was asked by Netanyahu to push to extend the benefits of the law – a move that would have helped Milchan. But Lapid balked, and he has since told his story to investigators.

The Tax Authority has very much opposed the 2008 law and has made at least three attempts to amend it. These efforts have only targeted the income-reporting exemption, not the exemption from paying tax.

So why should the obligation to report income put off new immigrants or returning Israelis? In addition to the hassle and expense of filing a report, some people might be concerned that if they disclose information, the Tax Authority will call them in for questioning.

Then there is a 2009 provision empowering the finance minister, with the approval of the Knesset Finance Committee, to extend the law’s benefits for an additional 10 years if the immigrant or returning Israeli has made a substantial investment in Israel. This provision was passed by the Knesset in 2009 but the regulations necessary to implement it have never been enacted, and the Tax Authority has therefore asked that it be repealed.

As the Tax Authority sees it, the 10-year exemption gives room for things like money laundering, not to mention difficulties regarding Israel’s obligations to share information with other countries.

The exemption was enacted to encourage aliyah and the return of Israelis abroad and was hurriedly applied in 2008, retroactive from January 2007. It also gave its beneficiaries a one-year adjustment period; for one of the 10 years they would not be considered Israeli residents for tax purposes.

How many people are using the exemption? It’s impossible to know because these people don’t report this to the Tax Authority and are only reporting their Israeli income.

Since the law has now been in effect for 10 years, some people are now required to report all their income abroad and pay tax on it. In Milchan’s case, if as has been reported he returned to Israel in October 2009, he still has a year and a half of his 10-year exemption.