Tax Authority Gets Aggressive Against Aggressive Planning

The Income Tax Authority is clamping down on the aggressive tax plans of the population's upper tenth of a percent.

Income Tax Commissioner Jacky Matza yesterday presented his battle plan, which includes two innovations. First, those who practice aggressive tax planning must bring it to the attention of the tax authorities in order to examine it in depth. Second, if the tax authorities do not accept the plan and the courts rule in favor of the them, the assessee will be fined 30 percent of the taxes that were not paid.

The proposals still require Knesset Finance Committee approval.

Matza estimates that the new measures will increase tax collection from Israel's largest companies and most senior businessmen by hundreds of millions of shekels a year. This is in addition to the planned increase in tax collection from the authorities' campaign against the most aggressive tax plan of all - the setting up of trusts abroad.

Aggressive tax planning is the exploitation of tax law loopholes, which, according to the tax authorities, are against the spirit of the law, in order to decrease the assessee's taxes. Such exploitation can be very sophisticated, and therefore, is practiced by only large companies and rich businessmen, who can afford the country's most senior tax experts.

Exploiting loopholes is legitimate, and is reported to the tax authorities in a company's yearly reports. However, since the income tax authorities cannot examine every report presented to them, most aggressive planning goes unnoticed. As a result, they go unchallenged on the grounds that they are against the spirit of the law.

To deal with the problem, the income tax authority has released a list of the 13 most common tax plans, with the exception of the foreign trusts - which are being dealt separately. Anyone using one of these plans will have to explicitly bring it to the attention of the tax authorities starting in their 2007 tax reports. Anyone who fails to do so will be liable to criminal charges.

Matza emphasized that bringing the tax authorities' attention to a plan does not mean that they will not accept it. "It does mean that we are not comfortable with the plans in the list, and that we will want to examine each case in depth," he said.

He also emphasized that the income tax authority wants to abolish the win-win situation, under which there is no risk to the assessee in tax planning. Until now, in the worst case scenario, the tax authorities would not accept the plan, and the assessee would have to pay the tax in full. Under the new proposal, if the tax plan is not accepted and the court rules in favor of the tax authorities, the assessee will have to pay the tax in full, plus a 30 percent fine.

Anat Roeh adds:

One opponent of Matza's battle plan is tax attorney Pinhas Rubin, who did not hesitate to express his opinion to the head of the tax authority in an address to the Israel Bar conference. Rubin said tax planning is legitimate and unavoidable and part of the basic rights of the assessee.

He said there is no problem with disclosing tax planning, but there is a problem if the authorities hang the threat of a 30-percent fine over the assessee's head. According to Rubin, a lawyer formulating a tax plan for a client will have to advise his client that the plan may go to court, and if it is not accepted, he will be fined 30 percent. Rubin said this is unconstitutional and unreasonable, and the authority should be fined 30 percent if it loses in court.