Israeli officials suspect that a law intended to lure former residents and immigrants has enabled tax evasion and are pledging to crack down on what may be tens of thousands of cases.
With a 10-year reporting exemption up this year, tax authorities are pledging to find people who don’t file returns and audit those they suspect of not disclosing taxable income including domestic wages and capital gains. The 2008 law exempted income from foreign sources or foreign-held assets.
Officials can’t be sure how much evasion there is since people didn’t have to file returns, but a random check in 2014 found that 1 in 6 individuals eligible for the exemption were suspected of irregular financial activities. Nearly 200,000 people immigrated to Israel between 2008 and 2017, according to the Central Bureau of Statistics.
Because of the reporting exemption, there’s also no data to indicate the sums involved, officials said.
“I think it’s quite a lot. Many people came to Israel based on these exemptions,” said Benny Kalifi, head of the tax department at Shiboleth law firm in Tel Aviv.
Tax authorities have tried to repeal the exemption every year since 2013. But the law is politically popular because it is seen as helping to staunch a brain drain that deprives Israel of many top scientists, inventors, and entrepreneurs.
“The reporting exemption completely undermines law enforcement in Israel,” by denying the authorities access to data necessary to do their jobs, according to a report from Tax Justice Network Israel.
Without that data, the best that tax authorities can do now is go after people they see as either deliberately evading the law or wrongly interpreting the exemption as being blanket.
Violators Will Be Found
The tax exemption never applied to earnings from remote work for foreign companies after arrival in Israel, to earnings from work in Israel, to investments such as bitcoin, or to profits earned from Israeli companies bought before or after their arrival, Kalifi said.
Tax officials said previously exempt taxpayers would now be required to file returns if they have income. Those who should, and don’t, will be found, officials said.
“There are many instances where people may not have understood they need to report. We will find them and remind them that they need to pay tax,” Eran Yaacov, tax authority director general, told Bloomberg Tax Dec. 5.
Tax lawyers say they know people who consciously violated the law are scrambling to work out deals and others may be shocked by big back-tax bills.
“People who claimed that they were entitled to an exemption may be challenged by the tax authority” and questioned about income back to their arrival, Kalifi said. People in that situation are already negotiating payment of back taxes with the authorities, who have been sympathetic to those coming forward to declare, he said.
Those at the end of their 10-year exemptions need to adjust to paying tax if necessary and reporting their assets, said Boaz Feinberg, partner and head of tax and financial regulation at Zysman, Aharoni, Gayer and Co. law firm in Tel Aviv.
“What I would do is prepare a dossier of all the financial assets you have and had for the last 10 years and before, so there will be no question with regard to anything the tax authorities may ask about the source of the funds,” Feinberg said in an interview. “Anything you have outside of Israel is now taxable. In some cases, it may be more beneficial to sell some of your assets before the 10 years elapse so you will be entitled to the tax exemption on the sale.”
Most of those affected are likely to be law-abiding taxpayers who misinterpreted the rules or started earning income without realizing they needed to declare it, said John Fisher, an independent tax consultant.
“There may be confusion among some first-time residents as to what constitutes Israeli-sourced income and foreign-sourced income, which may lead to interesting discussions with the tax authorities,” Fisher told Bloomberg Tax.
Others may decide to leave Israel as their 10-year window closes, he said.
“There is a phenomenon of tax tourists who tend to move from one convivial jurisdiction to another to avoid paying tax. This was the case in the U.K. with the change in the non-domicile rules and in Israel there may well be an exodus of people leaving before the end of their 10 years,” he said.
Opponents of the exemption are continuing efforts to force a repeal of the measure, saying it is a revenue drain and creates a haven for people looking to illegally hide assets.
The tax authority backs and “is constantly working for” the repeal of the exemption, Yaacov said. “There’s a very positive attitude toward repealing it. I’m optimistic,” he added.
But there are no current plans to repeal or change the measure, Mickey Levy, an opposition legislator on the Knesset Finance Committee, told Bloomberg Tax.
“The political pressures in favor of keeping it in place are enormous,” said Levy, who tried and failed to reduce the exemption when he was deputy finance minister.