The Israel Tax Authority has been working continually and intensively on a legislative program designed to give it more tools and powers in the war on unreported income and wealth. In this context, the Tax Authority seeks to expand the obligation to file tax returns, in order to make taxpayers' affairs more transparent so that it can decide whether they are paying tax as required or are hiding income from the state. To this end, the obligation to file returns has been widened concerning a matter that may appear technical, but that in fact will have a dramatic effect on many people: Israeli businesspeople who relocate overseas for a period, and foreign citizens living in Israel unknown to the Tax Authority.
The legislative amendment concerns the physical presence test that determines whether or not a person is resident in Israel for tax purposes. Under the Income Tax Ordinance, an Israeli resident is liable to income tax on their worldwide income, whereas a foreign resident is liable only on income produced in Israel. Residence is determined according to the test of a person's "center of life", whereby their connection to Israel is examined according to criteria such as possessing a home and vehicle in Israel, having family in the country, economic connections, and so forth. There is however an additional test for determining residence, which is the physical presence test, whereby a person who is present in Israel for more than 183 days a year is assumed to be an Israeli resident. This assumption is rebuttable, and in many cases people who spend more than 183 days a year in Israel do not report on their income to the Israel tax authority, relying on the other tests of residence and on expert opinions, that overturn the physical presence assumption. In such cases, there may be no reporting to the Tax Authority at all.
Under the new amendment, a person who claims not to be a resident of Israel but who falls within the physical presence assumption, being in Israel for more than 183 days in a year, will be obliged to file a report detailing the facts on which the non-residency claim is based, with supporting documentation. This is in addition to a report on the person's income in Israel.
The Israel tax Authority thus seeks to expose various kinds of tax planning on the part of Israelis who relocate overseas for a period, or who constantly travel overseas, and receive expert opinions that they are not liable to tax in Israel. The reporting required by the proposed amendment will mean disputes with the Tax Authority, which in some cases will argue that the person concerned is an Israeli resident for tax purposes and will require a report on all their overseas income. This will lead to many more civil cases vis-a-vis the Tax Authority, as well as exposure of taxpayers to criminal proceedings for tax evasion.
Published by Globes [online], Israel business news - www.globes-online.com - on April 25, 2016
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