The Tax Man Comes Knocking - So Let's Get it Right!
The Tax Man cometh...
Q. We seem to be facing an abundance of tax changes in recent months. What brought about this ‘tsunami’ from the Tax Authority and Knesset?
A. While I don’t think we have a tax ‘tsunami’ brewing here, the public does perceive it to be so. The Treasury is constantly on the lookout to add to its coffers, and the Trachtenberg Commission (appointed in the wake of the social justice protests) recommended increasing Income Tax rates, providing certain new tax credits, and reducing the National Insurance (Bituach Leumi) ceiling, among other courses of action.
Q. How do these changes impact taxpayers, and what should we be doing to minimize the ‘damage’?
A. The top marginal rate of tax on monthly earned income exceeding NIS 41,830 has increased by 3% to 48%, while tax rates for the middle income level (NIS 8,881 – 14,430 monthly) have dropped by 2% to 21%. In addition, taxes on dividends, interest (not all interest) and capital gains have risen by 5%, which is material. These changes may be mitigated – or partially so – by planning, including timing. It should be noted that the reduction in the Bituach Leumi ceiling (now NIS 41,850) may reduce BL payments substantially for higher income earners
Q. I am a majority shareholder in a successful start-up company. How will the changes in tax on dividends, interest and capital gains affect me?
A. If you own 10% or more of the equity in a company, then the Income Tax on dividends distributed by your company is now 30%. (Until December 31, 2011 it was 25%.) In addition, if you or your fellow shareholders have made loans to the company, you will be subject to 30% tax on the interest thereon. And, if you sell some of your shares in this company, the gain will be taxed at 30%. So, this is the time for serious tax planning and review. In some instances, the corporate entity may have tax disadvantages, but do remember that there are other factors to consider (viz. business, financial, foreign taxes, etc.). Finally, the ‘play-off’ between salaries and dividends, particularly in closely-held companies, has been materially impacted, so review your salary and dividend strategies.
Q. I was unaware that the Income Tax Laws changed some year ago, requiring residents of Israel to report on foreign income and assets. I read recently in the press that a Tax Amnesty was in effect until June 2012. What is this Amnesty about, and how, if at all, can I ‘come clean’?
A. Israel introduced worldwide reporting and taxation of income in 2003. The Amnesty is applicable in particular to unreported income from foreign assets (inherited/gifted) or from foreign assets acquired – on which taxes were paid – or income from foreign assets reportable since 2003.
You will have to pay the taxes due, but the Amnesty provides for immunity from criminal proceedings, and a waiver of penalties and interest. In certain instances, there may be a waiver – full or partial – of linkage (C.O.L.) differences too.
Q. What do I have to do to apply for the Amnesty?
A. An application must be submitted to the Special Committee appointed for this purpose, providing full and accurate details of all the relevant information. (Applications need to be made until June 30, 2012.) There are various conditions that apply, including the stipulation that the income does not originate from a criminal offence. If the application is approved, the Special Committee will also be involved in the preparation of the assessment for tax. Information from an application that is not approved may not be used in civil and criminal proceedings.
These FAQ are prepared for information purposes only. While every care is taken in compilation, no responsibility can be accepted for inaccuracies or errors. Readers are advised that changes in the Law or practice occur periodically. It is strongly recommended that specific professional advice be sought before any action is taken.
Broide and Co. (www.broide.com) is a Jerusalem-based CPA firm, providing accounting, auditing, taxation, management and business consulting services to clients in Jerusalem and the Greater Tel Aviv areas.