The Israel Tax Authority celebrated the new civil year by publishing a new batch of reportable tax positions on January 1.
A reportable income tax position is a position contrary to a position published by the ITA by the end of the year concerned if the tax advantage exceeds NIS 5 million in the tax year or NIS 10m. over four years.
So if your tax planning is at odds with an ITA position, you must tell them so they know where to start a tax audit. The ITA may then persuade you to fall in line, take you to court, look for others with your position and initiate a legislative amendment.
The ITA learned these techniques from the reportable tax shelter rules in the US, UK and elsewhere.
However, no reporting is needed from certain Israeli charities, nor from individuals or companies with income below NIS 3m. or capital gains below NIS 1.5m. in the tax year.
For VAT and customs purposes, the tax advantage threshold is NIS 2m. in the year or NIS 5m. over four years.
The income tax positions must be reported within 60 days after filing the main annual income tax return and the VAT positions must be reported within 60 days after the year-end. Below are some highlights of the latest batch of reportable positions.
The ITA takes the position that bitcoins and other virtual currencies are property. If you sell them, you pay capital gains tax or even income tax if you trade them. In addition, the ITA says that a “virtual currency” is not a currency or foreign currency, so “for the avoidance of doubt” the difference between the sale consideration and the cost is not regarded as indexation or forex movement, i.e. gains on virtual currencies are not exempt from Israeli tax law, according to the ITA. Comment: This is the ITA’s position, but alternative views abound.
Withdrawals from companies
In 2017, Israel tightened up the rules for taxing cash withdrawals and use of company assets by 10%-or-more shareholders, as dividend or salary. The ITA takes the position that the rules even apply to cash and assets of foreign companies in countries that have a tax treaty with Israel. If the other country doesn’t tax these items, Israel may do so, without giving a foreign tax credit.
For these purposes, assets include company apartments located abroad.
Furthermore, cash withdrawals from Israel are taxed after netting off credit balances owing to the shareholder. The ITA takes the position that share capital and share premium don’t count as credit balances.
Deferred asset consideration
Israel taxes capital gains within 30 days, even if the sale consideration is paid in installments. This is unlike the case in the US and elsewhere. Now the ITA has issued a detailed position that may mitigate things for the taxpayer. If the parties spell out an interest rate, the interest element may be stripped out (using a “Spitzer table”) and taxed subsequently on a cash or accrual basis, as applicable to that taxpayer. For example, if the sale consideration is NIS 10m. paid over 10 years, with a 5% interest rate specified, NIS 2,278,265 will be taxed as interest rather than capital gain over the 10 years – with more interest in the earlier years (NIS 386,087 in year one, reducing to NIS 47,619 by year 10 in this example).
If a company buys back its own shares out of retained profits, the ITA takes the position that the purchase amount should be taxed as a dividend distributed to shareholders, even those that did not take part in the repurchase. But reporting is required only for shareholders whose holding rises.
Olim capital gains
If a new immigrant sells shares in a foreign company that derived most of its value from an asset in Israel, the ITA takes the view that the 10-year exemption does not apply.
If a foreign company’s main activity in Israel is warehousing, the ITA takes the position this is a taxable “permanent establishment” in Israel. This effectively adopts OECD recommendations on BEPS (base erosion and profit shifting) aimed especially at ecommerce operators.
The ITA says companies that bill related parties on a “cost plus basis” should include share option gains and non-deductible expenses in their costs. Comment: This disregards the usual need for arm’s length pricing.
These reportable positions are back-door law that may close perceived loopholes without troubling the Knesset, but they may open up double tax exposure.
US olim may be the first casualty when they try to reconcile different US and Israeli tax rules.
The ITA’s positions are not set in stone. The Israeli courts in recent years have become well versed in tax matters and don’t always agree with the ITA.
But the courts do look to the substance of what is going on, so taxpayers should think twice before taking an aggressive position to court.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.