Equalizing Tax on Foreign, Local Stock Draws Mixed Reviews

The Finance Ministry's decision to lower capital gains tax on foreign securities from 35 percent to 15 percent in 2005 elicited mixed reactions from experts yesterday.

Yair Rabinowitz, chairman of the committee that drafted the tax reform plan that took effect this year, welcomed the move, which will equalize tax rates on foreign and Israeli securities. He said that his committee had advised postponing this step only because the shekel was then in a nosedive, with the exchange rate almost NIS 5 to the dollar, and the committee thus feared that cutting the tax on foreign securities would encourage capital to flee the country and drive the exchange rate down even further, to NIS 5.5. Now, with the shekel stable, there is no reason not to equalize the rates, he said.

But former income tax commissioner Moshe Gavish slammed the decision to wait until 2005 to make the move, saying it ought to be done in 2004. By making the change effective only in 2005, he charged, the treasury benefited the banks, the brokers and the Tel Aviv Stock Exchange at the expense of the small investor.

The financial institutions wanted the delay for two reasons: fear that the change would hurt the TASE, and a desire for time to prepare for the move. But Gavish said that delaying the change means that small investors in pension, provident and mutual funds will be deprived of the option of diversifying their portfolios. This inability to diversify will be particularly devastating now, he said, because the treasury's decision to stop issuing special bonds bearing above-market interest rates to the pension funds requires these funds to search for alternative high-yield investments.

There is no reason to think the change would hurt the local market, he added, because institutional investors are unlikely to put more than 5 to 10 percent of their money overseas.