The Tax Authority's Challenges: Eliminating the Tax Exemption, Netflix VAT, and Taxing Foreign Companies

Tax Authority Director Eran Yaakov will have to find out how to bring tens of billions of shekels into state coffers this year, after the deficit has already reached 3.7% of GDP in an interview with Globes. He tells how the next finance minister will fill the budget pit without raising taxes on companies and individuals. Will deal with the ho

2020 will open this week on a non-optimistic economic note. Beyond breaking the deficit target that currently stands at 3.7% of GDP, even though its target is only 2.9%, the state budget will subtract hundreds of millions of shekels following the third round of elections in a year or so. The result - the Treasury will have to find "there from" another tens of billions of shekels that are missing from the state.

Even before it began, the coming year could be crowned as "the lost economic year" for most government ministries, which will suffer significant cuts and will have to forgo - it seems - most of the promises that will be broken into space during the election period. This is because this is a year based on the "continuation budget". When there is no functioning government, and no budget can be passed, the state's "Plan B" comes into effect - or its official name: the "continuing budget."

As of January 1, each government office's budget will be based on the original budget for the current year, in relation to 1/12 of the current year's budget or the next year's budget proposal, whichever is lower. So in the next three months, Knesset candidates will make a plethora of promises - for better infrastructure, better welfare services, a higher level of education and whatnot - that most of them cannot.

It seems that no matter who sets up the next government, his 2020 challenge will be to put money into the state coffers, and plenty. Here, as always, you enter the Tax Authority, which is the state's money machine. The deficit and the political and legislative stalemate have made the classic role of the tax authority - to fill the state coffers - much more challenging.

Last year, the tax authority found itself in a situation where it could not promote legislative initiatives that could put money into the state, while at the same time initiatives that do not require legislation are stuck, due to the political instability and inability of the finance minister to advance truly significant moves.

That situation is turning 2020, when - hopefully - there will already be a functioning government and a functioning Knesset into a "probationary year" when the million dollar asked how the state coffers would be filled again.

In a conversation with "Globes", the tax director Eran Yaakov wants to answer this question, as much as possible before the next Finance Minister is appointed, and to put some order in the plans and challenges of the near future. "One of our significant challenges in 2020 will be how to fill the public coffers without hurting the evolving business-economic world, in the face of global change and high global growth," says Jacob. "We strive not to raise taxes that will hurt growth. If corporate taxes are raised, the attractiveness of the State of Israel and people's motives for doing business will be severely harmed, and raising taxes on individuals could also be burdensome to citizens."

Can you avoid raising taxes in 2020, even in the face of the existing deficit?

"You can avoid raising taxes that hurt growth, but make tax increases or exemptions where needed. Handling exemptions and tax breaks is the right solution. For example, taxing vegetables and fruits, taxing applications that get paid, but are not taxed here, and there are still a few ideas." .

The proposal to impose VAT on vegetables and fruits is not a new proposal. It is a proposal that has been on the table for more than a decade, and each time a targeted by politicians and other officials are undermined. Its proponents claim that its immediate economic significance will be hundreds of millions of dollars in state coffers, But beyond that, it will mainly help in the long run to fight black capital. The exemption from VAT on fruits and vegetables allegedly created a situation where some of the factors in the vegetable and fruit supply chain did not report to the tax authorities about their income. The imposition of VAT will lead to reporting and reducing tax evasion.

Opponents argue that the imposition of VAT will raise the price of vegetables and fruits, reduce the consumption of this essential and basic product, and will hurt mainly the weaker layers. Over the years, politicians have opposed this move, with the motive likely to be a loss of voter share. On fruits and vegetables is not high.

In recent times, Jacob has also spoken quite a bit about his desire to abolish the tax exemption on income from rental housing - when the income is up to about NIS 5,000. This issue has also been on the table for years, but has failed to pass the legislature again and again.
The Decision Economy: How to Tax a Ride for Work

The next tax authority's plan concerns the alternative markets and services that exist today. "One of our challenges in the coming year is to regulate the taxation of the 'decision economy'," Jacob explains.

This is a tax challenge that arises from the development of the collaborative economy and digital innovation. At the same time as the cooperative economy, the phenomenon known as the Tax Authority has evolved, which includes business-oriented activities that are profitable, but carried out by individuals. These are, among other things, shuttle services, where private individuals collect passengers on the "on the road" charge; In private lessons; Renting private parking; Renting private cars by the hour; Sales of clothing, products and services on social networks and more.

According to Jacob, "This is a significant problem that the tax authority is facing, where as many people become self-employed - become peer-to-peer traders - giving private lessons, doing errands, occasional shuttles and more. In these cases we need to find the formula As for where the seam between private and business goes. For example, the question arises when a shared trip is business, is it when I take the neighbor to work is fine and what happens when I gather foreign people along the way? "

Jacob says that "because of the ease of payment transfer and services management in the digital economy, many people forget that they have to pay tax on these revenues. For example, people who sell dresses and clothes on Facebook or pay at Bit or Paybox for private lessons and forget to report. And digital payment doesn't mean you don't have to pay tax. "
Taxation of multinational companies: Should Netflix pay VAT

The digital economy offers tax authorities quite a few challenges for the coming year. Around one of these challenges - how multinational companies operating on the net will be dissolved - there have been lengthy debates between the PA and the major internet giants in recent years. "This is a significant challenge for the tax authority - the challenge of determining the physical location of the multinational corporations' economic activity (permanent establishment). We are addressing this period," says Jacob.

By saying "therapists," Jacob is referring to the endless controversy that the tax authority has been facing with the internet giants, including Google and Facebook, since the authority announced its intention to tax them on their income in Israel from their online activity. "This is a global problem, and this year we will put emphasis on it and aspire to end existing disputes," he said.

Another tax challenge born of the digital economy is the determination of VAT on intangible services and products. "We are currently examining the question of VAT on intangible products, such as apps that pay a monthly fee or a lump sum," says Jacob.

The classic example of this is the Netflix content services that can be consumed through the mobile app. Currently Netflix does not pay VAT in the country for the sale of these services.

Beyond the digital economy, Jacob also addresses taxation challenges in more "classic" markets, including the automotive market, where Jacob plans to find a way to compensate the state coffers for losing fuel tax revenue. According to him, "We are currently examining the possibility of taxing private cars based on vehicle use. The tax authority charges over NIS 40 billion in the world of vehicles - excise duty on fuel, purchase taxes, customs, value of use and more. There are many vehicle taxes.

"One of the new issues, in the era when vehicles are becoming more electric and hybrid, is the fact that fuel use is decreasing, but on the other hand, congestion on roads is constantly increasing. There are vehicles on the road but the tax on them is lower because they are New Age vehicles. On the Israeli economy, so one of the significant challenges is how to tax vehicles as a function of their use and not as a function of fuel consumption for example. This is one of the biggest challenges we face this year. "
The Black Capital War: The solution will come from technology

When you leave the planned "new taxes" for a moment and return to the ongoing enforcement and collection work of the authority, the tax authority is also facing challenges. Jacob explains, "Another challenge of the PA is deepening the fight against black capital and fictitious invoices. Part of the way to address this challenge is to build a technology system that prevents fictitious transactions in advance.

"We are currently developing a model where the tax authority can test in advance whether every transaction made is in advance, as is the case with accepted credit card models. Today every small offender issues fictitious invoices in millions and millions of shekels. This is a state blow. This is not a tax authority's problem, it's A bag problem that needs to be addressed. "

According to Jacob, "The transition between generations - the Y generation and the Z generation, is a challenge for the tax authority, because this public wants everything accessible, fast and mobile. They want tax services to be easier and more accessible, and we need to move forward And more technology to keep up. "

In preparation for his summary of the challenges for the coming year, Jacob notes, almost by the way, the tax authority's desire to be exposed to more citizen information. It should be noted that this issue was very close to the heart of the previous authority's manager, Moshe Asher, who sought to establish more and more databases available to the authority.

According to Jacob, "We are working to improve the ability of the tax authority to get more information from the financial world in real time. In the digital age, and with the advancement of technology, apps and the Big Data, one of the biggest challenges facing the tax authority is its ability to be more focused and efficient, and build trust This is through data, everything is data-based today, and if I have the relevant data from all possible financial sources, I can reach places where there is a tax evasion, subject to respecting each citizen's privacy issue.

"Obtaining real-time data from financial institutions, financial bodies, businesses and from every possible source will improve our ability to reach taxpayers, overcome real-time problems, and most importantly, get to the point where people who pay tax legally are on the green paths and can let them go."

On the service side, Jacob presents himself with a challenge that sounds like an almost impossible task to implement in 2020 - a human response of the Citizens Tax Authority in 90 seconds. "We want to put the customer, the citizen, at the center and make our services more accessible, for example, that within 90 seconds the tax authority will provide a telephone answer and enable faster and more widely accessible internet tax coordination today."

It will be interesting to check in about a year some of the ambitious plans that Eran is talking about, have actually been implemented in the year that begins with the basic need for huge deficit coverage.

"As soon as a new government is set up, income tax and VAT increase"

While tax administration director Eran Yaakov is planning big plans for 2020, tax experts believe he has some previous challenges to deal with. They also agree that putting money into the fund is the biggest challenge, but not everyone believes that the state can avoid direct tax increases on citizens, as the PA director hopes.

According to Advocate and Accountant Liat Neuvirt, Partner and Head of Tax and Tax Department Goldfarb Seligman and Deputy President of the Institute of Certified Public Accountants, "The fact that there is no political stability and ahead of a third election, the state budget deficit, the slowdown in tax revenues, and the fact that there is no budget 2020 will have a significant impact on tax policy in the coming year. As soon as a new government is established, we will see immediate legislation and increased income tax and VAT to close an estimated NIS 30 billion exception. All tax legislation is stuck even though the professional committees set up by the tax administration director Eran Yaakov are holding intense discussions with representatives of the bureaus and government officials. , However much uncertainty. "

Another way to put money into the state coffers - and a lot - is to attract international tech giants to the country, as well as encourage local companies in the field. According to attorney Yuval Navot, a partner in the tax department at the Herzog Fox Neeman office, "One of the tax authorities' biggest challenges this year will be to find ways to encourage Israeli technology companies in the face of American tax reform and the world's growing tax competition, with the incentives to incorporate or operate outside of Israel." .

He said, "Trump's tax reform has shredded the cards in that sense and it is forcibly moving: on the one hand, lowering effective tax rates for US companies exporting products or services, and on the other hand milling the taxation viability of US-owned companies that earn profits outside the US in subordinate US companies For a low tax rate (GILTI legislation).

"In the US, at the beginning of the Obama era - long before Trump's reform, he offered individuals investing in certain US companies exemption from capital gains tax in the sale of the Exit shares, subject to ceilings. We now see in practice many companies that are incorporated in the US as well as many Israeli companies that choose to "reverse sleeve" and reunite in the US. "

In recent years, a number of laws have been enacted that have expanded the Authority's enforcement and collection, while at the same time the Authority has been working to collect financial information about citizens under information exchange agreements with many countries. Against this backdrop, one of the questions that needs to be asked this year is how she will handle all the new work. Attorney Rani Schwartz, a partner in Yaron-Elder's office, Fleur, Schwartz & Co., says implementing the "Cash Law", for example, will not be a challenge this year. He says, "The next year is expected to begin with real enforcement of the law, which will require general adaptation. Even on the margins which to this day have not exactly followed the provisions of the law. "

Schwartz also adds that processing information received from foreign countries and tax authorities within Israel's many information exchanges and cultivating this information will also be a significant challenge this year. "Collecting information is not everything. Obtaining information from foreign countries automatically or proactively will require the allocation of special resources and special preparation by the tax authority, how to process the information obtained and these are ways to take," says Schwartz.

Adv. Doron Peso, from the office of Adv. Doron, Tikotsky, Cantor, Gutman, Ness, Amit Gross & Co., also adds to the challenge of digital currency taxation. "The state must formulate an efficient way to collect tax from distributed currencies. In 2019, like its predecessors, a steady increase in the rate of transactions in decentralized currencies - Bitcoin, Ethrium, Lightcoin, etc. - and the growth in income of people active in this area is also expected. Effective revenue collection challenge in this activity, which is by its very nature intended to be carried out with great anonymity without reporting the extent of the amounts to third parties. "

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