Israel was ranked No. 83 for ‘‘ease of paying tax‘‘ out of 183 countries surveyed in a report.
It is common to hear people berating the Israel tax system with words like: ‘‘My friends say paying taxes in Israel is a bureaucratic nightmare.‘‘ Is there an objective way of measuring the bureaucracy in the Israeli tax system?
The answer is yes, there is an objective way that also compares Israel with other countries. The World Bank Group, assisted by the accountancy firm PriceWaterhouse Coopers, published a report called ‘‘Paying Taxes 2010 – The Global Picture.‘‘
This is the fifth year they have done so, and their report indicates the ease of paying taxes in 183 economies around the world including Israel. The report is part of a wider study by the World Bank on doing business worldwide.
The Paying Taxes indicator measures tax systems from the point of view of a domestic company complying with the different tax laws and regulations in each economy. The case-study company is a small to medium-size manufacturer and retailer, deliberately chosen to ensure that its business can be identified with and compared worldwide.
The authors‘ stated objective is to ensure that the results can be measured on the same basis for each economy, which enables comparisons to be made.
The study provides quantitative data to inform and stimulate discussion, enabling governments to benchmark their tax systems against others, and to identify possible priority areas for reform. Following is a review of some intriguing highlights.
What makes a good tax system? All countries must raise taxes, and the task of governments in meeting this requirement is not an easy one, particularly in the current economic circumstances. What is important is how the tax system fulfills these objectives.
The tax system should encourage, not discourage, business growth.
Higher taxes should contribute to improving the quality of life for citizens, and tax administration should be as professional and efficient as possible.
So what makes a good tax system? Here are some characteristics: First, the tax system should have a clear purpose: raise revenue to fund public expenditure; balance the budget (over a period of time); meet social objectives; and improve human development.
Second, the tax system should be strategic, meaning: stable and consistent, enabling long-term business investment; a fair value for natural resources; encourage international trade; encourage a change in behavior that society is agreed upon.
Third, the tax system should be coherent and efficient: minimize the administrative burden; clear and understandable rules; consistent with wider (nontax) law and international principles; consultation on policy and administration.
Fourth, the tax system should be fair and transparent: based on law rather than the whims of tax authorities; consistently enforced; with an independent and effective route for resolving disputes with the tax authority; and mutual trust and respect between taxpayers and the tax authority.
Measuring it all Reducing the corporate income-tax rate is not the whole story. In fact, corporate income tax is only 38 percent of total taxes as a percentage of profits, as the total tax rate also includes labor/social-security taxes (33%) and other taxes such as sales tax/VAT (38%).
Furthermore, the number of tax payments and the time needed are also indicators of bureaucracy In 2009, 45 economies made it easier for businesses to pay taxes – almost 25% more than in the previous year.
Reforms over this period both lowered the tax burden on businesses and simplified the tax compliance processes. Twenty economies- including Israel- reduced corporate income-tax rates, while nine reduced labor tax rates.
A second category of reforms focused on making it easier to file tax returns and pay taxes. In particular, 18 economies, more than in any previous year, introduced electronic filing and payment systems.
Electronic filing Electronic filing is considered good if you can pay all your taxes on one go.
A good example for countries to copy is Sweden. In Sweden, a typical company can pay all of its main taxes (corporate income tax, labor taxes, VAT and property taxes) in a single online payment. That earned Sweden the highest ranking in the EU and the No. 3 ranking of all 183 economies.
How does Israel compare? Here‘s how Israel scored according to the findings published by the World Bank:
* Total number of tax payments per year: 33 (OECD average is 13).
* Time it takes to prepare, file and pay (or withhold) the corporate income tax, the value-added tax and social security contributions (in hours per year): 230 (OECD average is 194).
* Amount of taxes on profits paid by the business as a percentage of commercial profits: 24.7% (OECD average is 16.8%). These results actually seem low; presumably they reflect that in the current international recession, some firms made losses.
* Amount of taxes and mandatory contributions on labor paid by the business as a percentage of commercial profits (including mandatory socialsecurity contributions paid by the employer both to public and private entities, as well as other taxes or contributions related to employing worker): 5.3% (OECD average is 24.4%).
* Amount of taxes and mandatory contributions paid by the business that are not already included in the previous two categories: 2.5% (OECD average is 3.3%).
* Total amount of taxes and mandatory contributions payable by the business: 32.6% (OECD average is 44.5%).
* Overall ranking: Israel was ranked No. 83 for ‘‘ease of paying tax‘‘ out of 183 countries surveyed in the report.
For comparison, the UK was ranked No. 16, the Maldives No. 1 and Belarus No. 183.
Some comments Israeli tax rates are significantly lower than the OECD average, but the number of annual payments and time needed results in a mediocre World Bank rating for Israel due to perceived tax bureaucracy.
The report does not go into further detail, but we might surmise a few things. First, to reduce tax fraud, Israel has more detailed bookkeeping and withholding-tax regulations than found in most other Western countries. You cannot write up your transactions after the end of the year on a spreadsheet.
You must use software approved by the Israel Tax Authority and record income immediately. And you must file by the 15th day after each month returns for payroll income tax, National Insurance Institute payments, VAT and income tax monthly, accompanied by the respective tax payments. In practice, virtually every business in Israel uses a professional bookkeeper or accountant to write up their accounts promptly.
Is this such a bad thing? Not always.
The Israeli system doesn‘t always increase the accounting burden, it just makes you get it done sooner. And it frees up dynamic Israeli businessmen: they can go out and make money and leave the bean counters to count it.
What about the British Empire? Thanks to the British Mandate in 1917-1948, the Israeli tax law bears similarities to the law in other ex-UK colonies, etc. How did they rank in the World Bank report? Here are a few: Hong Kong No. 3, Singapore No. 5, South Africa No. 23, Ireland No. 31, Seychelles No. 34, Cyprus No. 37, Trinidad & Tobago No. 56, Antigua & Barbuda No. 128, Zimbabwe No. 131, Nigeria No. 132, Pakistan No. 143, Kenya No. 164, India No. 169, Jamaica No. 174. The average is No. 88, so Israel didn‘t do so badly at No. 83. The UK itself was No. 16.
Your comments please The authors of the World Bank report are to be commended. The report did not comment on the tone sometimes experienced, the jealousy some have for olim, that they cannot always find your letter or form filed, or that they are not always there when you need them. On the other hand, the report did not mention that many tax officials are friendly, knowledgeable efficient and underpaid people trying to assess and collect taxes the state badly needs.
Readers are invited to send me their comments, and I‘ll try to publish them.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd