Israel Scraps Plans to Toughen Foreign Earnings Tax Rules

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By Ben Stupples

Aug. 18 — Israel has backtracked on plans to crack down on tax evasion by scrapping changes to a law that exempts residents from tax on foreign earnings.

The Finance Ministry's first state budget draft had proposed altering two articles of the country's Income Tax Ordinance, which allows foreign or returning Israeli residents to pay no tax on income earned from overseas assets for a decade after the date on which they became an Israeli citizen.

But lobbying against the proposed changes by Sofa Landver, cabinet minister for immigrant absorption, has blocked a vote on the proposals—which means that new immigrants and returning Israelis will remain exempt from disclosing their foreign earnings.

Landver argued the changes would have deterred entrepreneurs and wealthy individuals from moving or returning to Israel, according to the Tel Aviv-based newspaper Haaretz.

Skeletons

Daniel Paserman, a partner at the law firm Gornitzky & Co. in Tel Aviv, told Bloomberg BNA Aug. 4 that anyone with “skeletons in their closet” would have been deterred by the proposed amendments. “This was included last year and was eventually taken out,” he said.

The Israeli law—similar to the U.K.’s non-domicile legislation that allows residents who have their permanent home outside the country to pay no U.K. tax on foreign income—was introduced as an incentive to attract Israeli citizens who had emigrated. The lack of required disclosure has since created opportunities, however, for new arrivals to take advantage of the incentive and evade paying tax.

“The bottom line is that the government wants to have all the possible information in order to audit the taxpayers,” Paserman said on why the Finance Ministry originally included the changes.

HSBC Accounts

The government's proposed tax changes come as the Israeli Tax Authority announced Aug. 1 that French tax authorities turned over a list of unreported foreign bank accounts at HSBC Switzerland, including 8,000 Israeli-held accounts. The authority plans to initiate an investigation into whether these accounts have been reported under its voluntary disclosure procedure, which has been extended until Dec. 31.

Tax Authority Director Moshe Asher has encouraged Israeli taxpayers with foreign bank accounts to avail themselves of the voluntary disclosure program. Following legislative amendments earlier this year, tax evasion is now an underlying offense to money laundering, subject to criminal prosecution. The voluntary disclosure program grants immunity from prosecution but will still require taxpayers to pay back taxes and penalties.

Inadvertent Tax Shelter

Israel has inadvertently emerged as a tax shelter under laws designed to encourage Jewish immigration, Asher said in December 2013 at the Institute of Certified Public Accountants in Jerusalem. The government granted new immigrants and returning Israelis a five-year exemption from paying taxes on their foreign assets in 2003. Five years later, Amendment 168 to the Income Tax Ordinance doubled the exemption period to 10 years.

With assistance from Joanne Baxter in Washington.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

The original draft budget, in Hebrew, is at http://src.bna.com/htd.

Israel's news release on the turnover of HSBC documents is at https://taxes.gov.il/About/SpokesmanAnnouncements/Pages/Ann_010816_1.aspx.

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