As we move into the New Year, it’s worth taking stock at the micro fiscal level. So we got out our crystal ball to see where we appear to be heading. In practice we know more about profit than prophet, but here’s our best guess:
The Defensive Edge operation apparently cost Israel around NIS 11 billion. That money has already been spent on everything from Iron Dome to bullets to battle rations for the troops in the field.
We didn’t need a crystal ball for that, we used our rear view mirror. There is little that the government and its ministers can do except give thanks and cover the payments already made.
Of course, an injection of money of that magnitude into the Israeli economy will likely boost GDP growth in the new year.
Fines Are Not Fine:
It seems that taxes won’t be going up and VAT on first homes may soon drop to zero. That also means zero tolerance for taxpayers who are late paying taxes or filing returns – they will incur fines and interest which don’t count as taxes but help replenish the state coffers.
Transparency – FATCA:
We can also expect greater transparency all round. Israel and the United states signed a FATCA agreement on June 30 and a bill before the Knesset will ratify that agreement.
Under FATCA (Foreign Account Tax Compliance Act), Israeli banks are required to search for, and hand over to the Israeli Tax Authority (ITA), data about accounts belonging to US persons.
And by September 30, 2015, the ITA must start forwarding that data to the IRS in the US. Happy Rosh Hashana to the IRS next year.
Transparency – OECD:
As for non-US persons, their bank accounts around the world will soon be reported to their home country under separate but similar proposals of the OECD.
They are known as the Common Reporting Standard, and will require a lot of computing power. It is assumed the banks not only have the data, but also the computing power. These proposals are expected to be endorsed at a G20 summit in Australia in the coming week.
Multinationals – What’s In Store:
Multinational groups are also in the firing line for legally avoiding taxes in many countries. This usually involves a combination of transfer pricing policies to shift profits offshore, and a use of tax treaties that aims to avoid all tax, not only double tax.
In addition, there are hybrid entities (e.g. LLCs in the US), hybrid financial instruments (e.g. subordinated debt) and hybrid arrangements which have nothing to do with the environment. They usually defer tax for a long time.
The OECD and member governments, including Israel, hope to collect more tax from multinationals. The latest OECD action plan of September 16 includes proposals to make digital enterprises pay tax where they create value. This is assumed to be onshore. But the proposals are still at the conceptual stage and won’t be fleshed out until the last part of next year.
Multinationals are taking seriously another proposal to make them provide each tax authority they encounter with a “master file”. These will shine a light on profits and taxes worldwide. Tax authorities will then be able to assess the risk that they are getting less than their fair share…
Hybrid payments which result in double expense deductions or no income anywhere will be blocked by denying one of the deductions.
Back to Israel:
Israel is an OECD member and in 2013 its budget deficit was around NIS 28 billion. But consider this. Most world trade is conducted via related multinational groups. They are supposed to apply arm’s length transfer pricing, but this is a flexible concept as many factors must be considered – including functions, assets and risks.
Israel’s imports and exports in 2013 totaled around USD 200 million. Suppose hypothetically, another 15% could have been allocated to Israeli concerns. The additional company tax on that would approximate….NIS 28 billion.
Multinationals should start preparing their master files and value creation studies.
The Apple and the Honey….
To close on a happy note, don’t forget Israel will shortly be a gas superpower supplying energy, collecting taxes and depositing the surplus in a sovereign wealth fund.
Budget deficits may soon become a thing of the past?
Wishing all our readers a Shana Tova.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.