The OECD issued a report on December 3, 2015, which concludes that global corporate revenues are falling, putting higher burdens on individuals. Israel joined the OECD in 2010.
Corporate contribution to tax revenues:
According to the OECD, corporate tax revenues have been falling across OECD countries since the global economic crisis of 2007-8. Average revenues from corporate incomes and gains fell from 3.6% to 2.8% of gross domestic product (GDP) over the 2007-14 period. Revenues from individual income tax grew from 8.8% to 8.9% and VAT revenues grew from 6.5% to 6.8% over the same period.
Who is to blame?
The OECD blames multinational corporations for this state of affairs. “Corporate taxpayers continue finding ways to pay less, while individuals end up footing the bill,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. “The great majority of all tax rises seen since the crisis have fallen on individuals through higher social security contributions, value added taxes and income taxes. This underlines the urgency of efforts to ensure that corporations pay their fair share.” In other words, the multinationals not only suffered from the credit crunch crisis, they also engaged in tax planning more successfully and extensively than the OECD would like.
Action – BEPS:
So on October 6, 2015, the OECD published around 1,000 pages of new tax recommendations to governments for dealing with so-called “Base Erosion and Profit Shifting” (BEPS). This provides governments with recommendations and solutions for closing the gaps in existing international rules that allow corporate profits to “disappear” into cyberspace or be shifted to low/no tax environments, where little or no economic activity takes place. BEPS addresses transfer pricing, internal financing, treaty shopping, use of agents and other tax planning techniques.
Action – tax increases:
Revenue Statistics shows that the average tax burden across OECD countries increased to 34.4% of GDP gross domestic product (GDP) in 2014. The increase of 0.2 percentage points in 2014 continues the recent upward trend, as the OECD average tax burden has increased in every year since 2009 when the ratio was 32.7%. The tax burden is measured by taking the total tax revenues received as a percentage of GDP.
While the increase in tax ratios between 2009 and 2014 is due to a combination of factors, the largest contributors have been increases in revenue from VAT and taxes on personal incomes and profits, which combine to account for around two-thirds of the increase. Revenues from social security contributions and property taxes account for the majority of the remainder.
Many countries have raised tax rates or broadened tax bases or both. The OECD average standard VAT rate has increased to a record high, rising from 17.7% in 2008 to 19.2% in 2015. Twenty-two of 34 OECD countries raised top personal income tax rates between 2008 and 2014.
The tax burden in Greece increased from 31.2% to 35.9% between 2007 and 2014. Two other countries; Denmark and Turkey showed increases of more than 4 percentage points over the same period.
Denmark has the highest tax-to-GDP ratio among OECD countries (50.9% in 2014), followed by France (45.2%) and Belgium (44.7%).
Mexico (19.5% in 2014) and Chile (19.8%) have the lowest tax-to-GDP ratios among OECD countries. They are followed by Korea, which has the third lowest ratio among OECD countries at 24.6%, and the United States at 26.0%.
Compared with 2007 (pre-crisis) tax to GDP ratios, the ratio in 2014 was still down by 3 percentage points or more in three countries – Israel, Norway and Spain. The biggest fall has been in Spain – from 36.5% in 2007 to 33.2% of GDP in 2014 (3.3 percentage points).
What about Israel?
According to the OECD, Israeli tax revenues amounted to 31.1% of GDP in 2014, which was better than the OECD average of 34.4% (http://www.oecd.org/ctp/tax-policy/revenue-statistics-19963726.htm). This puts Israel at 11thplace out of 34 OECD member countries. Back in the year 2000, the Israeli tax burden was 35.6%.
As for the split of taxes, Israel raises around 31% of its tax revenues from income, profits and gains, compared with the OECD average of 34%. Also, Israel raises around 17% of its tax revenues from income, profits and gains, compared with the OECD average of 26%. This is on the plus side.
However, Israel collects 39% of its tax revenues from goods and services (VAT, fuel, etc) compared with the OECD average of 33%.
Although the standard rate of VAT in Israel of 18% at the beginning of 2014 (17% since October 1, 2015) looks better than the OECD average of 19.1%, Israel grants a reduced rate of VAT (0%) to a very limited number of goods and services. Other OECD countries are more generous with their lower rates of VAT and other taxes on goods and services.
Israel raises 9% of its taxes from property compared with the OECD average of 6%. Israel also raises 4% of its tax revenues from payroll taxes on financial institutions, charities and foreign workers compared with the OECD average of 1%.
To Sum Up:
Israel is not the high tax country it used to be. And the ITA has not published any views on adopting the OECD’s recommendations regarding BEPS.
Moreover, since 2009, foreign investors have been exempt from Israeli capital gains tax on Israeli shares and bonds, whether public or private.
But the bookkeeping and reporting rules are, in our experience, a good deal tougher than those found in most other OECD countries. Many corporates and Olim are caught unawares by the penalties imposed if they file only a day or too late.
As always, consult experienced tax advisors in each country at an early stage in specific cases.