03.06.2010

Laws, regulations and so forth cannot possibly relate to every situation and circumstances – there can be many details, possibilities and outcomes.
An assessing officer‘s lot is not a happy lot – to misquote Gilbert and Sullivan in ThePirates of Penzance.

Israeli tax laws allow tax assessing officers a considerable degree of discretion. This is a fact of life. The various laws, regulations and so forth cannot possibly relate to every situation and circumstances. There can be many details, possibilities and outcomes for every section in the law. So assessing officers have the authority to exercise discretion, and we rely on them to do so in a reasonable fashion – not arbitrarily or capriciously.

For example, Israel has a well-developed system of withholding tax on payments between business firms and payments to a nonresident. In most cases, Israeli banks are obliged by law to withhold 25 percent tax from payments to foreign residents, unless the local assessing officer of the payor approves any lower tax rate; for example, pursuant to a tax treaty.

Sometimes, getting that approval is not easy, as the tax office applies its discretion: Is the recipient really resident in the tax-treaty country concerned or is there some ‘‘treaty shopping‘‘ going on by people resident elsewhere?

Another example: Did a firm really make a loss one year, or did it somehow cook its books?

So how do we know if an assessing officer applied his discretion in a legal and fair way? In cases of disagreement there is an objections procedure, and ultimately an aggrieved taxpayer can apply to the courts for relief. There is no tax tribunal system in Israel. Most of the decided cases are cases of interpreting the meaning of a specific section or the facts of a specific case: How much did a taxpayer really earn? Were his motives economic or tax driven? Were proper procedures followed?

So what about general rules regarding the exercise of discretion vested in a tax official? It seems we need to look more generally at cases involving government officials; not only tax officials in Israel.

In the R.M.Y. case, the Supreme Court (Case 696/89) ruled that an administrative authority must weigh up all the relevant factors to be legal and pertinent. In this case. the administrative authority concerned was found to have acted differently in another similar case. The court emphasized that an administrative body must act consistently in reaching similar decisions in similar cases – this being referred to as ‘‘substantive equality.‘‘ This may have ramifications in the tax world.

For example, suppose another taxpayer gets a better tax ruling than you do? The Haifa District Court case (Income Tax Appeal 589/04; Ariela and Moshe Shahar v. Hadera Assessing Officer) ruled that the Israel Tax Authority must strive to avoid inequality. The case dealt with stock options of a well-known company.

The judge ruled that an executive body such as the ITA cannot reach an arrangement that discriminates between different taxpayers in similar circumstances and prevent the arrangement being applied to the one of them. Furthermore, such arrangements should not be signed and concealed.

In another case of the Supreme Court (Shlalam Case 799/80) ruled that once an authority grants a license to do something, it can take it back only in extremely serious cases. In this case, a firearms license was granted to someone with a past criminal record. The court ruled that it was not enough to say the license was issued in error; it was also necessary to show that the applicant fraudulently misled the authority, or that the circumstances had changed in an extremely significant way.

The Supreme Court ruled that there was no distinction in this regard between a license to operate firearms, or a taxi, or a profession or any other confirmation received from an administrative authority.

In the tax world, this might imply in the above example that if a tax official issues wrongly a withholding-tax exemption certificate, it can only be changed in exceptional circumstances involving a fraudulent misleading application by the taxpayer to the tax authority.

Finally, Israel‘s recent accession to the Organization for Economic Cooperation and Development commits Israel to applying the principles of the OECD in many areas, including the application of double tax treaties.

To sum up, it seems that tax and other officials in Israel are not supposed to act in an arbitrary or capricious way if it involves acting differently than in other similar cases, or canceling a confirmation that you applied for in good faith.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

leon.hcat@gmail.com

Leon Harris is an international tax specialist at Harris Consulting & Tax.