Year-End Tax Planning Tips for Businesses
The end of the tax year, that is December 31, is nigh. Are you in good shape tax-wise? Here are a few examples of the many things that businesses may be worth reviewing with their advisers in Israel and any other country where they have a connection.
Beat the proposed tax rises
According to a Knesset bill, it is proposed to raise Israeli tax rates from January 1, 2013. This is to pay for reforms intended to answer the demands for social justice by tent demonstrators in Israel this summer and the recommendations of the Trachtenberg Commission.
What are the main proposals?
For companies, it is proposed to increase the regular rate of company tax from the current 24% to 25% in 2012.
For individuals, a new higher tax bracket of 48 percent is proposed, for business and employment income above NIS 40,000 per month, or approximately NIS 480,000 per year in 2012. Currently personal income-tax rates range up to 45%. For business and employment income above NIS 1 million per year, an additional 2% special surcharge is proposed, making the proposed top rate 50% for individuals.
The tax on dividends, capital gains and land appreciation will go up 5% under the proposals. The regular rate will increase from 20% to 25%. The rate for major shareholders (holding 10% or more) will increase from 25% to 30%.
Therefore, consider accelerating bonuses, dividends, interest payments and capital gains into 2011, where possible if you don‘t mind paying the resulting reduced tax sooner.
It is true that a decrease is proposed in 2012 in National Insurance upper-income limits from nine times the national average wage to five times (about NIS 40,000) in 2012. But if you own a company and need cash soon, taking a dividend in 2011 may still save you more than a salary bonus in 2011 or 2012.
Businesses may also want to consider whether expenses or losses can postponed until 2012 if they may be used to save tax at the higher proposed rates then. But if that means showing higher profits this year the resulting tax this year needs paying shortly.
Check your international transactions with related parties (50% ownership link among other things) are on arm‘s-length market terms before you close your books and theirs for the year. The tax regulations require taxpayers to sign an express declaration to this effect on Tax Form 1385 and attach it to their annual tax returns. They must also be able to produce a ‘‘transfer pricing study‘‘ in this regard within 60 days after any demand from the Israel Tax Authority. In practice, this can be a great opportunity, not only an obligation. If in doubt, consider requesting an ‘‘advance pricing agreement‘‘ from the Israel Tax Authority.
Consider charging interest. Under special rules, the lender is taxed on the interest he is deemed to have undercharged, but the borrower can‘t deduct interest he didn‘t pay.
The prescribed minimum rate of interest for Israeli tax purposes on loans granted in the period October 1, 2009, the minimum rate is generally 3,3% up to December 1, 2011, rising after then to 5.24%.
There are a number of exceptions for back-to-back loans, foreign-currency loans and back-to-back foreign-currency loans.
Inventory (stock) count
If your business has inventory (stock) year-end value impacts on the profit you report this year. The tax regulations require all tangible inventory to be counted if it is held for sale in the ordinary course of business, or is in production ahead of such a sale, or will be needed in order to supply goods or services for sale.
You have to count not only goods you own, but also other goods you hold for others, e.g. on consignment (becomes yours when you sell it) or already sold to the customer. Obviously, if the goods are not yours on December 31, you count them but don‘t include them in your year-end inventory.
When do you count the inventory?
On December 31 (a Saturday this year), or any date between December 21 and January 10 if you make appropriate adjustments to arrive at the year-end inventory, or some other date if you notify the Israeli Tax Authority before the year-end and have a detailed inventory recording system.
At the time of the count quantities matter and the shekel values can be added later.
At the inventory count, the sheets on which you record the quantities must be consecutively numbered and dated, state the location and describe the goods in a way that identifies them. State the quantities you are counting – units, kilograms, etc. Note separately obsolescent, slow-moving and defective inventory. Each count sheet must be signed by the counters and their name(s) must be stated. When you come to value the inventory, apply the lower of cost or market value, on a specific basis or FIFO (first in first out), never LIFO (last in first out).
Long term projects – go slow?
Detailed rules apply to those that carry out long-term work projects lasting over a year – mainly builders. If the builder is a contractor who does not own the building, income must be reported this year if the work is 25% complete this year. If the builder is a developer who owns the building, reporting is needed when the building is fit for use.
Detailed rules govern the above as well as expenses, finance expenses and losses. A detailed review is obviously necessary ahead of the year-end.
Get your timing right
We already mentioned the tax rate increases proposed for 2012. Timing can be important for many other things in Israel as well. These include:
paying national insurance contributions on non-salary income as 52% is deductible as an expense, when paid, for income tax purposes ;
charitable contributions in order to get a tax credit equaling the company tax rate (24% in 2011) on donations of totaling NIS 400- NIS NIS 400 in and NIS 4,208,000 in 2011 but not more than 30% of taxable income;
prepaid rental income is taxed upon receipt;
replacement of depreciable fixed assets to get a tax deferral or loss deduction;
offsetting loan interest expense against dividends (e.g., Paz Gaz and Pi Glilot cases);
taxpayers with low-taxed controlled foreign companies;
taxpayers intending to claim foreign tax credits;
businesses allowed to report income on a cash basis;
companies required to withhold tax from payments in Israel or abroad in order to deduct the payment as an expense; payments to 10% shareholders;
payments to provident/pension funds;
payment of tax installments including those for nondeductible expenses;
bonus payments; filing lawsuits for bad debts where appropriate;
achieving exports of 25% of sales for a ‘‘preferred enterprise‘‘ (Mifal Muadaf) in industry or technology in order to enjoy tax breaks for profits and dividends under the Law for the Encouragement of Capital Investments;
increasing foreign investment this year in companies owning an approved tourism enterprise or an approved property, to help achieve a bigger tax break next year.
A privileged enterprise (mifal mootav) wishing to elect 2010 as its ‘‘election year‘‘ to initiate tax breaks under older provisions in the Law for the Encouragement of Capital Investments, must do so in their 2010 tax return or by the end of 2011, whichever is earlier.
In our next column, we will discuss year-end tax planning for individuals – there is a myriad of additional things to consider.
As always, consult experienced tax 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.