How Israel Combats Corruption


An overview of a circular issued by the Israel Tax Authority.
Earlier this year, the Israel Tax Authority issued a circular on the Israeli legal and tax aspects regarding: ‘‘Prohibition on Payment of Bribes to Foreign Public Employees‘‘ (Circular 2/2011, January 23, 2011). The following is an overview of the circular.

Israel‘s commitments
Israel subscribed to the United Nations Convention Against Corruption in February 2009. The following month it subscribed to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Israeli penal law
The Israeli Penal Law was amended in 2008 by adding Section 291A, which provides that the law on giving a bribe to a foreign public employee is the same as giving a bribe to a local employee.

Consequently, it is illegal to give a bribe to a foreign public employee, even if this is done indirectly via an intermediary, or if the beneficiary is a third person.

This applies to a bribe made to achieve, assure or promote business activity or an advantage relating thereto.

One of the underlying principles embedded in Israeli case law is that the bribe can be for an act related to the function of a foreign public employee, even if the employee isn‘t authorized or entitled to do so but carries out the function concerned.

A ‘‘foreign public employee‘‘ is broadly defined to include employees of a foreign state, public office holders and employees of international organizations, among others. A ‘‘foreign state‘‘ includes any sovereign body in a foreign state, including federal, state or local bodies and state bodies not belong to a state, such as the Palestinian Legislative Council.

The maximum prison sentence is now seven years for giving a bribe and 10 years for receiving one.

Tax treatment of bribes
On the Israeli tax side, Section 32(16) states that no expense deduction will be allowed for ‘‘Payments, whether made in cash or in kind, where there is a reasonable basis to assume that making them constitutes an offense under any law.‘‘

This section took effect in November 2009, but earlier court cases in Israel had already reached a similar conclusion. The net effect of Section 32(16) of the Income Tax Ordinance plus Section 291A of the Penal Code is a prohibition on deducting bribes to foreign public employees in international transactions.

Transparent records
As for transparency, unlike most other countries, Israel has detailed bookkeeping regulations for tax and VAT purposes, which businesses in Israel must comply with (Income Tax Ordinance Section 130). Failure to keep compliant books, or the destruction or concealment of documents relevant to a tax assessment, is punishable by a year in jail and/or a fine (Income tax Ordinance section 216), as well as a ‘‘best judgment‘‘ estimated assessment by an assessing officer, in lieu of the taxpayer‘s self-assessment.

Tax officials are bound by a duty of confidentiality under Sections 234 and 235 of the Income Tax Ordinance, unless the finance minister allows otherwise. Nevertheless, the finance minister has delegated this power to the director of the tax authority (decision of July 6, 2005, published in the Notices Gazette number 5418). Consequently, the director of the tax authority is allowed to transfer information to the Israel Police regarding payments made by an Israeli resident to a foreign public employee that are suspected bribes.

The circular (2/2011) goes on to instruct Israeli tax officials to try to identify signs of fraud or corruption in their tax audits. These signs include: fictitious employees, deficient books, obstructive taxpayer behavior and invoices issued in tax-haven jurisdictions or places where the payer has no activity.

Tax officials should check whether relevant information is obtainable under information exchange articles in Israel‘s tax treaties. Simultaneous tax audits may be initiated in this way in Israel and other treaty countries.

Evidence may be assembled by means of analytical review of financial statements, checking books and records, interviewing the taxpayer and other parties, and in-depth examination of specific transactions. A company‘s internal check procedures may also be reviewed and so may excessive payments to external consultants.

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

Leon Harris is a Certified Public Accountant and Tax Specialist at Harris Consulting & Tax Ltd.

December 12, 2013
Font Resize