Last week the International Monetary Fund (IMF) published data about the flow of investments out of most of the world's countries and the key countries to which those investments are directed. A quick glance at the numbers shows that at the end of 2011, almost 40% of the foreign investment by Israeli individuals and companies went to Holland, $27.5 billion out of an overall $70.7 billion in investments.
The reason for these figures is the Dutch tax laws, allowing that country to be a "transit station" for capital, which is eventually moved on to a tax haven, as part of tax planning by individuals and companies, so that they can substantially reduce their tax payments.
Israel is not alone in this matter. Holland is the destination for "transit investments" for most countries in the world. Until three years ago these tricks hardly bothered anybody so that the sums involved in tax planning, or in other words legally avoiding tax payments, was growing and growing.
Alongside this phenomenon there were growing sums of black money or in other words illegal evasion of tax payments. The fiscal crisis which hit the world has really changed this matter. The world has already, led by the US and UK, embarked on a "tax war" against those evading tax payments and those who utilize tax planning. The war on tax received the official endorsement of the G8 countries which met in Ireland last week. The main requirement is, meanwhile, transparency in listing names. Every country including Israel must prove that it is contributing to the effort in terms of transparency regarding listing foreign investors, and every country must list in the most detailed way the real ownership of assets and money, and every country must increase exchange of information.
The G8 initiative mainly related to the war on black capital. This refers to a division of labor between international institutions with the OECD responsible for combatting tax planning. The OECD is leading the struggle against overly aggressive tax planning by companies, especially international companies, which take advantage of capital mobility and tax covenants between various countries to minimize their tax payments.
Although we don't hear very much about this war in the Israeli media but the campaign has already arrived here and will leave its mark in local legislation and compel the Tax Authority to be much more open in cooperating on passing on names.
It may well be that the high-tech sector will be the first to feel the change in the rules of the game. High-tech companies are about to discover that the Israeli authorities are far less tolerant towards attempts to transfer profits to tax havens on the grounds that intellectual property is registered in all types of exotic Caribbean islands or Switzerland. Over the years some of the companies have taken advantage of this registration to "pay royalties" to companies registered overseas and artificially reduce their profits. This will no longer be allowed and the 2013 assessments of these companies will be extremely different following global efforts to restrict tax planning.
Israel will be forced to pass on names
The other side of the coin is the flow of investment that reaches Israel to benefit from greatly reduced tax. From the point of view of the tax authorities in the countries where the investments originate from this is regarded as tax planning and Israel will be required to act on the matter. From a formal legal point of view the way to prevent this problematic situation is to prove that the Israeli investment is not fictitious and involves real activities such as R&D or production. But if these activities do not develop then pressure from the Israeli government will begin within a short period.
No less a major war is expected around application of the principles of transparency that developed countries implement. Israel will be force to change its legislation substantially to allow "an exchange of information" which will take place in two main channels. Firstly, exchange of information under bilateral agreements with other countries; secondly exchange of information through multilateral agreements that will stress developing automatic mechanisms for passing on names, assets and amounts of money.
Although in both instances Israel can receive names of individuals and companies with assets, it will also be forced to reveal names of those with assets and bank deposits in Israel.
Published by Globes [online], Israel business news - www.globes-online.com - on July 2, 2013
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