Our meeting with Israel Tax Authority head Moshe Asher was well-timed - just after the announcement of the Mobileye (NYSE: MBLY)-Intel deal, which should produce more than NIS 4 billion in tax revenue for the state, and the headlines about tax cuts, which are accounting for a healthy proportion of public discourse.
A rule of thumb is that income tax receipts are composed of two elements: the automatic element, withholding taxes, which are more or less stable, and income tax based on income reported by taxpayers, which involves active measures taken by the Tax Authority.
At the beginning of each year, and also during it, the Ministry of Finance revises its figures for growth and economic activity. The targets for the tax revenues that pay for the government's activity are based on these figures. It can therefore be stated that surplus tax revenues resulting from accelerating economic activity is already reflected in the Ministry of Finance tax revenue targets.
This is where the Tax Authority enters the picture. When the Ministry of Finance's forecasts are close to the actual figures, the government has enough resources to pay for its activities without enlarging the budget deficit. The Tax Authority's active measures will therefore generate unplanned tax revenue surpluses that are likely to provide a solution for problems for which money is lacking.
"Globes": Following the Mobileye deal, is a tax cut possible?
Asher: "At this stage, what is involved is one deal that is expected to contribute a large one-time amount to tax revenues. When a tax cut is involved, for example a cut in company taxes or income taxes for individuals, the cuts are for the long term. It is therefore necessary to make sure that the increase in tax revenues, excluding this deal, is permanent. This should be monitored, and a decision made accordingly. Keep in mind that only a few months ago, Minister of Finance Moshe Kahlon cut corporate and individual tax rates in the framework of the Economic Arrangements Law. In recent years, the Tax Authority has been operating more effectively, and the results are visible. Without any substantial addition in resources, we have collected billions of shekels in taxes in recent years beyond the forecast given to us. The system has undergone, and is still undergoing, profound internal streamlining processes that are putting it on the same footing as tax authorities in other advanced countries, such as the US and European countries. In certain aspects, we have even gone beyond them."
The technological revolution
One interesting and less widely publicized measure taken by the Tax Authority in recent years concerns the implementation of the technological revolution on an impressive scale. Ostensibly, it can be asked why the Tax Authority waited so long. The project is a very expensive one, however, and its broad legal aspects are no less important (some would say the legal aspects are more important). The Tax Authority receives an almost infinite quantity of information from many and varied sources on almost every person in Israel. Up until now, it has been difficult to access this information, integrate it, and use it to construct a complete picture of the economic system.
"We have been investing a great deal of money, know-how, and management resources during the past two years in order to mine the relevant information we have, cross-reference it, verify it, and work with it, with the objective of finding better cases and being more focused," Asher says.
"In recent years, we have expanded the network of people reporting to income tax by tens of thousands of people who never reported their income before. This expansion took place after we cross-referenced data within the system (for example, a person who owns three or more housing units, a person who travels overseas a number of times, a person who owns a luxury car, etc.). We sent over 130,000 short questionnaires about property and sources of income to people. The result of this project is that we have expanded the network of people reporting by more than 40,000 people who did not previously report, and we are collecting over NIS 1 billion from them that we did not previously collect, because we did not know about them.
"In another project, we formed a team to cross-reference data in the computer. This team detected and caused the closure of over 1,000 companies that distributed fictitious invoices. Furthermore, we are in the midst of an important comprehensive project - a "paperless Tax Authority." At the end of this process, reports for all types of taxes by individuals and companies to the Tax Authority will be digital and online.
"For example, the reporting system for withholding taxes is already online. The reporting system for income tax should go online by the end of the year. The reporting system for VAT for large businesses is already online, the reporting system for customs duties is already computerized, and when the "global gate" system goes online in another year, the Tax Authority will be completely paperless.
"The online system for land taxes is already active, but it is waiting for completion of suitable legislation in order to make it fully active. These systems will provide the data for the advanced work processes, and will constitute the database to which the Tax Authority is switching through business intelligence (BI) systems (supervisory and risk management systems). These systems will facilitate a better selection of cases for handling."
The BI withholding system developed by the Tax Authority is able to find withholding cases that require handling. For example, in a routine check of the system, companies were discovered that employed foreign workers without paying the special tax on them. This check gained $85 million in tax revenue for the state in just a few minutes.
This is a powerful tool. Are you maintaining checks and balances?
"Certainly. We can't act on our own authority without a legal basis, and we publish many circulars and instructions setting the borders of interpretation and activity for workers in various matters. Furthermore, almost all of the measures we take are civil measures, and are conducted after consultation with the legal office and professional division, with additional internal auditing. We institute criminal procedures in a small proportion of cases, with legal advice in cases where it is necessary. Make no mistake: the tax system is designed to collect only the true tax, all of which is returned to the public."
Struggle against unreported capital
In recent years, Asher has instituted a number of measures in the war against unreported capital, which is estimated at 20% of GDP in the Western world. "These measures are being instituted simultaneously in the Israeli economy. Some of them are at their height right now, while others will be felt in the coming years," Asher says. "We signed two dramatic agreements for information sharing between authorities: one with the US (the Foreign Account Tax Compliance Act - FATCA). In the other, we joined the convention led by the OECD (mainly with European countries. In addition, a Common Reporting Standard (CRS) agreement for automatic exchanges of information was signed. These agreements mean that the particulars of an Israeli citizen with a bank account in the US or other countries (over 100 countries) will be sent to the Israeli income tax authorities, and vice versa."
Asher demonstrated the effectiveness of these agreements, saying, "In matters pertaining to the FATCA agreement, to date we have received information about tens of thousands of Israelis who held accounts in the US in 2014 and 2015. This information is being processed now, and in near future, we will be able to begin checking matters with those Israelis."
The war against unreported capital also required legislative changes that were made last year, mostly consisting of the extension of the Prohibition on Money Laundering Law to include severe tax violations. Asher says, "This constitutes major progress in the Tax Authority's battle against tax evaders. It means that anyone who evaded the amount of tax stipulated in the law and concealed or camouflaged this money committed an offense under the Prohibition on Money Laundering Law.
"In this situation, the Tax Authority can confiscate the offender's unreported property, so that he does not benefit from his crime, and he can be indicted for a breach of the Prohibition on Money Laundering Law involving a prison term. We have been trying to pass this law for over a decade.
"It is necessary to realize that tax evasion is a serious crime. In the US, the law is being made more severe, and people there know that if they break the tax laws, there will be far-reaching consequences. That's how it should be in Israel, too. These legislative changes, in combination with the international agreements, enable us to act effectively against lawbreakers. At the same time, those who have not yet entered this circle are being deterred."
Together with the new laws and agreements taking effect, the Tax Authority began a "money laundering" campaign, with the possibility of new legislation in the background. The Tax Authority has allowed people to voluntarily disclose unreported capital and pay the taxes on it, without any criminal proceedings being instituted. "The measure was a success. The volume of requests for voluntary disclosure surprised even us. 7,500 requests were filed by Israelis, who disclosed the unprecedented amount of over NIS 25 billion in unreported capital," boasts Asher, who estimates the amount of tax collected and to be collected in the campaign at NIS 3 billion.
Closing loopholes and handling tax planning
One piece of momentous legislation passed last year, which touched a raw nerve among many people, involves the closing down of personal service corporations (wallet companies). An employee earning more than a certain amount (the amounts are usually large) establishes such a company, and receives his salary from it under the category of providing management services, for which the tax rate is less.
"It is unreasonable for us to accept this practice, which in Israel has expanded to plague proportions. A CEO becomes "CEO Ltd." solely in order to reduce the tax he pays. The substance of the CEO's work is being an employee. This loophole has cost Israeli citizens hundreds of of millions of shekels in recent years," Asher declares.
What about tax planning?
"This is a more complicated matter. First of all, tax planning is a citizen's legitimate right, but there is a limit to tax planning, beyond which it is no longer legitimate. In order to deal with extreme planning or interpretations, we have promoted legislation requiring taxpayers to report certain opinions that they have obtained from tax consultants, and the tax positions they have taken contrary to the views of the Tax Authority published on its website. We expect that as a result of this duty of disclosure, we will achieve more focused checking and handing for such cases, and the true tax collected with increase."
Published by Globes [online], Israel Business News - www.globes-online.com - on March 22, 2017
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