What is a Reportable Tax Position?
A reportable income tax position is a position contrary to a position published by the ITA by the end of the year concerned if the tax advantage exceeds NIS 5 million in the tax year or NIS 10 million over 4 years.
So if your tax planning is at odds with an ITA position, you must tell them so they know where to start a tax audit.
This is similar to reportable tax shelter rules in the US, UK and elsewhere.
However, no reporting is needed from Israeli charities, nor from individuals or companies with income below NIS 3 million or capital gains below NIS 1.5 million in the tax year.
For VAT and customs purposes, the tax advantage threshold is NIS 2 million in the year or NIS 5 million over 4 years.
The income tax positions must be reported within 60 days after filing the main annual income tax return and the VAT positions must be reported within 60 days after the year-end.
The Reportable VAT Position:
In 2017 the ITA published reportable VAT position 12/2017 which said that the purchase or sale of securities and other commercial paper, by an individual or company for themselves, with trading characteristics according to case law, count as financial institutions according to the VAT Law.
This would make them subject to a 17% wage and profit tax (in lieu of VAT) in addition to 23% company tax. This is a tax originally intended for banks and insurance companies. Most other countries that have VAT don’t impose such a tax on their financial institutions. The resulting tax burden on the profits of Israeli financial institutions approximates 34.2% as well as 17% on their payroll – a lot of tax….
Trading characteristics cited include: frequency, size, expertise, leverage, holding period, ongoing and systematic, asset type, special circumstances.
This reported position reflected published anonymous VAT Ruling 4396/15 and the Equitas court case.
The VAT Ruling:
A VAT Ruling (4396/15 of August 4, 2015) says the definition of financial institutions in the VAT regulations includes anyone whose business is selling foreign currency or securities or other traded instruments, even if they are held until maturity or redemption. Moreover, this applies even if they invest with their own nostro capital and even if they are not companies.
The Equitas Case:
In the Equitas case (District Court case 25935-02-16, June 26, 2017) , a company investing mainly its own nostro capital (96%) used an algorithm to make securities investments. In 2011 there were 4.5 million trades totaling NIS 5.6 billion.
In 2010 the company applied to the VAT Director to be classified as a financial institution, but later changed its mind and applied to the Tel-Aviv 4 Income Tax Office to stop being taxed as a financial institution. The Income tax Office refused.
The Court ruled the taxpayer was indeed a financial institution liable to wage and profit tax. Furthermore, the Court said that if for some reason the taxpayer wasn’t a financial institution, it was still subject to 17% VAT on the margin between purchases and sales or redemptions, according to another section in the VAT Law (Section 19(b)).
The above developments caused a stir for investors in the Israeli venture capital (VC) fund world and others. Large amounts of tax are at stake. Is nostro trading any different from using capital from private investors in Israel and abroad? The ITA initially responded by delaying the reporting deadline.
ITA Backs Down Partly:
On September 20, 2018 the ITA issued a short announcement that in the light of additional review, it has been decided to cancel reportable VAT position 121/2017. Accordingly, the position appears on the website all crossed out (https://taxes.gov.il/IncomeTax/Documents/AmadotHayavotDivuach/amadot_2017_maam_Acc.pdf). But that is not the only mess.
The ITA announcement is a turn for the better, but it is not enough. Does the ITA still want Wage and Profit Tax or VAT on gains from investment transactions? Or can we safely ignore the above Ruling and the Equitas case? Are there any other reportable tax positions under review? Currently there is a deafening silence and billions are invested in the Israeli tech and financial sectors.
If you are a securities trader, please contact us to discuss the latest VAT law aspects and how to proceed.
As always, consult experienced tax advisors in each country at an early stage in specific cases.