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By Matthew Kalman
Israel’s top tax official doubled down on a plea to repeal a controversial reporting exemption for new immigrants, which he said has turned the country into “one of the best, or worst, tax shelters in the world.”
Introduced in 2008, the tax break exempts Israel’s new immigrants and some returning citizens from reporting foreign assets and passive income for a decade after their arrival. Dubbed the “Milchan Law” after its most prominent beneficiary, it is at the center of a criminal investigation for bribery against Prime Minister Benjamin Netanyahu and Hollywood producer Arnon Milchan.
Moshe Asher, who is due to retire in March as the Tax Authority director general, told the State Control Committee of the Knesset parliament on Feb. 26 that he had tried and failed to amend the law “year after year” since assuming his position in 2013. Israel also narrowly avoided being sanctioned by the OECD and World Bank for the exemption, Chief Economist Yoel Naveh told the panel.
“The reporting exemption is invalid in principle and there is no reason to grant it. We have been walking blind for 10 years. We do not know how much the exemption costs, how many people got it, how many immigrated because of it, how much they invested, what we gained and what we lost, “ Asher told the committee.
The law encourages investment abroad “because on domestic investments immigrants and returnees pay full tax from day one,” Ahser said, adding he tried to repeal a related law allowing the minister of finance to extend the reporting exemption by another 10 years in certain cases. “The time has come to amend this law—and the sooner the better.”
Yoseph M. Edrey, professor of law and tax policy at Haifa University, recalled a Knesset legal adviser calling the day before a Knessett committee approved the tax law. Edrey urged her to warn legislators against approving it.
“She said they were going to do something totally unbelievable,” Edrey told Bloomberg Tax Feb. 27. “Totally wrong and it shouldn’t be done. As a loyal citizen I came. It was a terrible experience.”
The then tax authority chief supported the bill and accused Edrey of disloyalty to his country. “They were not interested in listening to me,” he said.
Reviewing the law in 2014, Israel’s state comptroller identified suspicious money-laundering activity in 100 out of 600 cases of new immigrants and veteran returning residents between 2008-2012 and recommended limiting the exemption.
The law has continued to draw international criticism. A 2016 OECD Global Forum peer review report highlighted “a legal gap” in transparency relating to trusts and companies controlled by new immigrants and returning citizens. The U.S. State Department called Israel a “major money laundering” jurisdiction in a 2016 report.
The exemption keeps Israel from providing information to authorities through information exchange agreements, said Moran Harari, founder and director of Tax Justice Network Israel.
“The law provides a back door for tax evaders and criminals to immigrate to Israel while keeping their earnings hidden from the Israeli authorities and as a consequence from other governments as well,” Harari told Bloomberg Tax in a Feb. 27 email.
The exemption’s repeal should be accompanied by expanding reporting obligations for other taxpayers, said Boaz Feinberg, a partner at Zysman, Aharoni, Gayer and Co. law firm in Tel Aviv.
“Obligating those who immigrated from a different country to file yearly reports regarding income they generated through their foreign bank accounts places them at a disadvantage compared to local residents who have generated income through their bank accounts, and are not liable to any reporting obligations due to the banks’ withholding tax scheme,” Feinberg said by email Feb. 27.
Many wealthy immigrants, mainly from western countries including the U.S., Canada, South Africa and France, made the decision to immigrate “while taking the special tax exemption into account as a major consideration,” he said.
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