The Israeli tax system was inherited after independence from Britain in 1948, but there are some differences. One concerns the lack of a tax court system designed to increase the perceived power of the Israeli Tax Authority (ITA) over the taxpayer. The ITA is increasingly making use of administrative tax circulars, tax rulings (published and unpublished) and reportable tax positions to the law in the ITA version of what the law says or should say. Israeli accountants and taxpayers often disagree. Sometimes the ITA sends draft laws to the Cabinet and then to the Knesset to refine or amend the text of Israeli tax laws. In most countries, tax law changes accompany the state’s annual budget process. In Israel, the budget process has stalled for political reasons.What do taxpayers and ITA disagree on?Many areas are open to disagreement – here are a few examples. Olim is said to be enjoying a 10-year Israeli tax vacation on foreign income and profits. However, the ITA has a guideline set out in circular 1/2011, according to which olim is denied tax exemption for work performed abroad if the taxpayer has been abroad for less than 40 days. There is no 40-day threshold in the law.
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The ITA has a guideline, which is laid down in the tax circular 9/2011, to completely refuse aliyah exemptions for Olim who participate in employer participation plans (ESOPs) approved in accordance with Section 102 of the Income Tax Ordinance (ITO). According to ITA, the tax is 25% sufficiently low, no need for 0% tax under different sections of the tax law. This is particularly controversial for high-ranking high-tech employees. Recently, on Reportable Tax Item 83/2020, the ITA ruled that the transfer of assets from the trust of one Israeli resident to another triggers a capital gains tax. This is sometimes done to remove foreign beneficiaries from the Israeli tax network. The position 83/2020, however, differs from the ITO regulations. When it comes to tax residency in Israel, the ITA sometimes takes an aggressive stance, saying that a taxpayer’s center of life has shifted to Israel after just 30-80 days of being in Israel. On the procedural side, the ITA is quick to demand payment of monthly income tax rates, interest and fines even if you didn’t know because the claim was late in the mail and won’t be copied to your accountant. And the ITA uses penalties – bank account freezes, bailiffs on your door and more.What is the appeal process?An appeal is lodged with a colleague of the tax officer in question against a tax assessment. If that doesn’t work, go directly to the District Court under ITO Section 153. There is no tax court system under way. Legal proceedings can take years (often case decisions go back 5 to 15 years), are expensive, and still may not be successful if the judge is influenced by tax revenues. And the ITA can increase the stake with fines of 15% – 30% of the tax differential per tax return and its tax assessment under ITO Section 191. This happens when the tax differential on the ITA tax assessment is more than 50% of the tax on the filing of the taxpayer, unless the taxpayer can refute the satisfaction of ITA by negligence.Tax courts needed in Israel: For some reason, Israel lags behind other countries as there is no tax court for complaints about tax matters. It is time to reform ITO Sections 153 and 191. The US and Canada have a system of tax courts and the UK has a tax court system. In general, the tax court process deals with the bulk of tax disputes, which reduces the burden. Tax courts are usually preferable because they are less formal than regular courts, much faster, and taxpayers generally do not have to pay the cost of hiring lawyers. Taxpayers can go into themselves or send in their accountant. In addition, tax courts are often perceived as fairer, as the judges usually have their own business and / or tax experience. In addition, the US and UK tax courts often decide or agree cases without the need for a hearing when the written complaint filed speaks for itself. All of this is sorely lacking in Israel.To conclude: The next Israeli government should put in place a tax court system to improve scrutiny, balance, and clean up the tax environment for businesses and others. Israel should benefit greatly at a low cost. As always, in certain cases you should seek early advice from experienced tax advisors in each country.[email protected]The author is an auditor and tax specialist at Harris Horoviz Consulting & Tax Ltd.