Attorney General Avichai Mendelblit’s announcement last week that he favors indicting Benjamin Netanyahu for fraud and breach of trust for receiving gifts from billionaire friends is just the start of the prime minister’s legal problems in Case 1000.
The prime minister could be liable for a huge tax bill and penalties for the estimated 700,000 shekels ($193,000) he received over the years. While the issue of the taxability of gifts has for long been unclear, a court ruling that coincidentally was issued just three weeks before Mendelblit’s announcement makes it likely the Netanyahus will find themselves liable.
At issue are gifts provided between 2001 and 2016, mainly by the Israeli-American Hollywood producer Arnon Milchan and to a lesser extent by the Australian billionaire James Packer.
Milchan is believed to have supplied the Netanyahus with some 250,000 shekels worth of cigars, 200,000 of Champagne and 11,000 of jewelry.
Packer topped that up with 145,000 shekels of cigars and 84,000 of Champagne, according to Mendelblit.
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Are those gifts liable for tax? The start of the answer lies in Section 2 of Israel’s Tax Ordinance, which details what sort of income is subject to tax.
It includes obvious things such as earnings from a business or a profession, as well as rental income or royalties from a work of art of a patent.
Section 2(10) covers income not explicitly mentioned elsewhere. Gifts don’t have to be liable for tax, if they are, for instance, given out of pure generosity, inside a family as financial aid or as an expression of thanks.
Children getting money or even an apartment from their parents are exempt from tax on the gift.
The Case 1000 allegations don’t fit any of those categories. Mandelblit asserts that at the Netanyahus’ request, Milchan provided “a supply line” of “boxes of cigars” and “crates of Champagne” for years to the family with the knowledge that Netanyahu would be able to provide something in return by virtue of his position as prime minister.
Tel Aviv District Court Judge Magen Altuvia ruled in that spirit in a case brought by the Israel Tax Authority against Rabbi Yekutiel Abuhatzeira, a descendant of a distinguished rabbinic dynasty and a grandson of Rabbi Israel Abuhatzeira, known as the Baba Sali.
The authority claims that he did not pay taxes on religious services he provided between 2003 and 2009, but Abuhatzeira argued he didn’t provide services at all at that he was simply the recipient of gifts from friends and loyal followers.
Altuvia acknowledged that occasional, personal gift-giving to mark an event like a birthday or holiday is exempt.
However, she distinguished between those kinds gifts and gifts given to someone holding an important position who, had he or she not been in office would not have been given a gift or had gotten a more modest one. Under these circumstances, she said, “what is called outside of the tax universe a ‘gift’ ceases to be one in the eye of the tax law for its recipient.”
Mendelblit’s allegations put the gifts Milchan and Packer gave the Netanyahus in that context — not born from an innocent desire to give a gift, but on a regular basis and in response to demands from the Netanyahus as to the type and quality of the gifts.
As a rule in bribery cases, the tax authority conducts its investigation alongside the police. In the Case 1000 probes, the authority has declined to comment, citing privacy rules. However, Mendelbit didn’t mention tax violations in his announcement last week, suggesting they won’t be part of any future indictment in the case.
Regarding penalties, the tax authority doesn’t have to wait until the end of criminal proceedings to make an assessment — otherwise it might run up against statute of limitations. Netanyahu could face a tax bill equal to 50% of the value of the gifts plus annual interest of 4%, which could add up to more than 500,000 shekels.