The Israeli Tax Authority (ITA) announced on June 28 that it is targeting tax evaders who rent out their homes on a short term basis via websites such as AIRBNB.

This comes just as Airbnb is reported to be lining up investors for a new funding round that would value the company at around $30 billion prior to a possible future IPO.

The ITA says it carried out an operation involving 58 audits in Tel-Aviv, Jerusalem, Haifa and Eilat and found that 33% home owners did not report their income. The operation was preceded by preparations that involved placing an online order and locating the home owners. The ITA says more of these audits are planned in the near future in the short term home rental sector.

In Tel-Aviv, 6 home owners were located via AIRBNB and BOOKING websites that rented out their homes but didn’t report their income to the ITA. One home owner failed to report as much as NIS 135,000 ($35,000 approximately). When asked about it, he replied: “I report according to 10% (optional flat rate for passive income), I didn’t know it is business income”. In another case, income of NIS 25,000 ($6,500 approximately) was not reported and no books were kept.

In Jerusalem, the ITA found 4 home owners who rented their home on a short term basis via Air BNB and failed to report their income. One of them who failed to report income of NIS 144,000 said: “I meant to open a tax file and report”.

In Haifa 5 home owners who didn’t report their income were spotted, they mainly said they didn’t know they had to report.

In Eilat, one home owner had two villas and was making NIS 1,000 – 3,000 per day, but had no tax file. When asked about it, he said: “I’m ill, I don’t have any strength”.

The ITA warns us that each of these cases is now under investigation.

Comments:

This ITA press release raises several tough issues.

First, it is far from clear whether all these home owners were conducting a business that necessitated immediate tax registration and bookkeeping. Many people rent out homes or rooms for varying periods, this is usually accepted as being passive not active in nature. If so, the 10% flat rate tax option is one of several options and the tax is reported and paid after the end of the year, not in June.

The ITA has not published clear guidance on what constitutes business income in the short term rental sector – such as the number of instances or a shekel threshold.

In practice, it is usually assumed that rental income from a handful of homes – say 5 or 6 –  may be considered passive, but any more may result in the entire rental income being taxed as an active business or trading activity. But a Tel-Aviv District Court judgment recently raised the bar to 28 homes that were inherited and left rented out  (Leshem V. Tel-Aviv 4 Assessing  Officer, Tax Appeal 1001/09, 1064/09, 39515-01-12, 34567-01-12 July 22, 2015).

Business income is subject to income tax and national insurance, generally at rates ranging up to 50%. Bookkeeping rules in Israel apply to businesses, but generally don’t apply to passive activities.

As for the internet angle, the ITA recently introduced a tax circular (4/2016) that seeks to tax a significant digital presence in Israel – this scarcely seems applicable to small time room renters and in any case the OECD discarded the whole concept of significant digital presence (see OECD Base Erosion Profit Shifting Action 1 report of October 5, 2015).

As for VAT, rental for residential purposes for up to 25 years is exempt from VAT unless the accommodation is at a hotel or guest house, which means accommodation for 5 or more people. So if a home owner rents out a room for up to 4 people, the transaction may be exempt from VAT, but taxed at rates of up to 50% as a business for income tax purposes – confusing.

Therefore, the ITA would do well to clarify the taxation applicable to the short term rental sector before launching sting operations and investigations.  Ignorance of the law is one thing, ignorance of an unpublished new policy is something else.

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.

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

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