Is the Israeli Tax Authority (ITA) too tough on taxpayers? If so, what can be done about it?
The ITA has a habit of using its clout, as well as administrative tax circulars, tax rulings (published and unpublished) and reportable tax positions to lay down the its version of what the law meant to say. Israeli accountants and taxpayers often find themselves disagreeing.
In most countries, tax law amendments accompany the annual government budget process. In Israel, the budgetary process is stalled for political reasons.
What’s needed is a tax tribunal system (and a budget).
What Do Taxpayers and the ITA Disagree About?
Many areas are open to disagreement – here are a few examples.
Olim (immigrants) are supposed to enjoy a 10 year Israeli tax holiday on foreign income and gains. But the ITA has a policy stated in tax circular 1/2011 of denying Olim a tax exemption for work done abroad if the taxpayer was abroad under 40 days. There is no 40 day threshold in the law.
The ITA has a policy stated in tax circular 9/2011 of denying Aliya exemptions completely for Olim who participate in employer share ownership plans (ESOPs) approved under Section 102 of the Income Tax Ordinance (ITO) – the ITA says that 25% tax is sufficiently low, no need for 0% tax under different sections of the tax law. This is controversial, especially for Olim hitech employees.
Recently in reportable tax position 83/2020 the ITA stipulated that transfers of assets from one Israeli residents’ trust to another triggers capital gains tax. This is sometimes done to take foreign beneficiaries out the Israeli tax net. But position 83/2020 arguably departs from ITO provisions.
As for fiscal residency in Israel, the ITA sometimes adopts an aggressive position saying that a taxpayer’s center of living shifted to Israel after only 30 – 80 days presence in Israel.
On the procedural side, the ITA is quick to impose demands to pay monthly income tax installments, interest and lateness fines, even if you did not know because the relevant demand arrived late by post and is not copied to your accountant. And the ITA deploys punishments – bank account freezes, bailiffs at your door, and more.
What is the Israeli Tax Appeal Procedure?
Appeals against a tax assessment are filed with a colleague of the tax official concerned, and if this is unsuccessful, straight to the District Court under ITO Section 153. There is no tax tribunal system on the way. Court proceedings can take years (often case decisions go back 5 – 15 years), cost a lot, and may still not succeed if the judge is swayed by tax revenue considerations.
The ITA has an active legal department ready and willing to go to court. Until your case comes up and succeeds all the way to the Supreme Court, the ITA has a free rein.
And the ITA can up the ante by imposing deficiency fines. These are fines of 15%-30% of the tax difference per your tax return and their tax assessment under ITO Section 191. This happens if the tax difference on the ITA tax assessment is over 50% of the tax on the taxpayer’s filing unless the taxpayer can disprove negligence to the ITA’s satisfaction…..
Tax Tribunals Needed in Israel:
For some reason, Israel lags behind other countries as it lacks a tax tribunal system of redress for complaints about tax matters. It is time to reform ITO Sections 153 and 191.
The US and Canada has a system of tax courts, the UK has a tax tribunal system.
Generally, the tax court/tribunal process deals with the bulk of tax disputes thereby reducing the burden on the regular court system.
Typically, tax courts/tribunals are preferable because they are less formal than regular courts, they are much faster, and taxpayers generally don’t need to incur the cost of hiring lawyers. Taxpayers can go in themselves or send in their accountant. Moreover, tax court/tribunals are often perceived to be fairer as the judges typically have their own business and/or tax experience.
Furthermore, in the US and UK tax court/tribunal systems, cases are often determined or agreed without the need for a hearing, if the written complaint filed speaks for itself. All this is sorely lacking in Israel….
To Sum Up:
The next Israeli government should be encouraged to introduce a tax court/tribunal system to improve checks and balances and clip the ITA’s wings. Israel should benefit greatly at low cost.
Contact us if you have a grievance against the Israeli Tax Authority. There is no tax tribunal system, but some arguments may stop them in their tracks such as double taxation or tax treaty override.
But if you want to see a tax tribunal system in Israel, the fourth election in two years may be a good time to raise a new important issue with all the political parties….
Leon Harris, [email protected]m
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd