Israel in 2017 is a country of contradictions. The economy is strong, but the cost of living relative to income is the second highest in the OECD. The high-tech sector is booming, but so is a massive fraudulent online trading and scam industry, which threatens to undermine Israel’s economic reputation and stoke anti-Semitism. Tel Aviv has become a beautiful, world-class, vibrant city, as well as increasingly unaffordable to all but the well-heeled. Meanwhile, a former prime minister is in jail for corruption, an ex-chief rabbi is headed there, and the current prime minister is under several corruption investigations, with each evening’s news broadcast seeming to bring fresh revelations from the police grillings of our elected leader or one of his family members.

Is there a single thread that runs through these disparate trends? Why has Israel become so rich, yet seemingly corrupt? How can it be so successful while 80 percent of income earners can’t afford an apartment unless they have family money?

It would be ridiculous to suggest a single, pat answer. Yet some observers point to the year 2008 as a time when Israel made a sharp turn onto its current trajectory, or perhaps when trends that already existed in Israeli society began to accelerate. 2008 was the year of the global financial crisis. It was the year the United States began its crackdown on Swiss banking secrecy. It was the year when Israeli apartment prices began their steep climb, rising 114 percent in fewer than 10 years. It was the year Israel’s first major binary options company, Anyoption, was founded.

And 2008 was also the year Israel passed an unprecedented tax law amendment that its critics say was essentially a nudge and a wink to would-be tax evaders and money launderers worldwide to settle in Israel and launder their money here.

Ostensibly a piece of legislation meant to encourage aliyah (immigration to Israel) by Jews living abroad, Amendment 168 to the Income Tax Ordinance was signed into law in September 2008 by prime minister Ehud Olmert. The change (which was retroactively applied starting January 1, 2007) grants a 10-year tax exemption on income earned abroad to olim hadashim (new immigrants) as well as toshavim hozrim vatikim (returning residents who have lived abroad for at least 10 years) and other eligible new residents. In addition, the amended law gives a 10-year exemption on reporting earnings abroad to people in these categories.

View of Tel Aviv at sunset (istock-slidezero_com)

View of Tel Aviv at sunset (istock-slidezero_com)

But while the amendment has probably helped some struggling new immigrants get on their feet during their early years in the country, that wasn’t it’s original intent, charges Bar-Ilan University economist Avichai Snir.

“The idea was to encourage aliyah to Israel of wealthy people by turning Israel into a tax haven,” Snir told The Times of Israel. “The new law definitely gave a nudge and a wink to people who had dirty money and wanted to launder it.”

‘Milchan Law’

Since Amendment 168 gives a 10-year tax exemption and tax reporting exemption on income from abroad to new immigrants and returning residents, under the right circumstances, a beneficiary can end up paying no income tax whatsoever. It’s an extremely generous tax benefit, and The Times of Israel had difficulty finding beneficiaries with a bad word to say about it.

“It helped me get on my feet in Israel,” said a writer of moderate means who immigrated in 2007. “The fact that I didn’t have to pay taxes on my freelance income from abroad made a big difference.”

Minister of Immigration and Absorption Sofa Landver pictured arriving at a weekly cabinet meeting in Jerusalem on January 4, 2014. (Marc Israel Sellem/POOL/Flash90)

Minister of Immigration and Absorption Sofa Landver pictured arriving at a weekly cabinet meeting in Jerusalem on January 4, 2014. (Marc Israel Sellem/POOL/Flash90)

Experts interviewed about the amendment believe there was probably one or more wealthy Jew living abroad who spearheaded the legislative initiative, but no one has ever come forward and identified themselves as such. The amendment itself was introduced by the Ministry of Immigrant Absorption and backed by the Israel Tax Authority, the Jewish Agency, Nefesh B’Nefesh and MKs Sofa Landver (Yisrael Beitenu), Ze’ev Elkin (Likud) and Yuli Edelstein (Likud).

Who else was behind the move? In a 2008 Knesset hearing on the amendment, a Jewish Agency representative mentioned that a group of unnamed Israelis living abroad had spearheaded it. Pinhas Rubin, a lawyer for billionaire movie producer Arnon Milchan, as well as other tycoons, was a strong proponent, but never revealed which client or clients he was acting to benefit. Nevertheless, the amendment was nicknamed “the Milchan law” by the Israeli press at the time.

“It’s named after Milchan because he was the first well-known billionaire to take advantage of it,” said Snir. Milchan’s name has been frequently in the news lately in connection with corruption allegations against Prime Minister Benjamin Netanyahu.

Arnon Milchan (center) with Shimon Peres (left) and Benjamin Netanyahu, March 28, 2005. (Flash90)

Arnon Milchan (center) with Shimon Peres (left) and Benjamin Netanyahu, March 28, 2005. (Flash90)

The amendment is also frequently and derisively referred to as a tax benefit for Russian oligarchs. Some of its backers, including Yuli Edelstein and Sofa Landver, have reportedly helped Russian oligarchs, on other occasions, obtain Israeli passports. An expose on Israel’s Russian-language Channel 9 claimed both MKs signed dozens of recommendations each for Russian oligarchs who do not actually live in Israel to receive Israeli passports, which are useful to them in their business affairs.

During hearings in the Knesset Committee for Immigration, Absorption and Diaspora Affairs, prior to passage of the law in 2008, proponents argued that it most decidedly wasn’t a narrow tax exemption for the rich.

“This law targets rich and poor,” said Yehuda Nasradishi, who was then director-general of the Israel Tax Authority. “In my opinion it includes everyone who immigrates to Israel.”

But Nurit Elstein, the Knesset legal adviser, said that while the proposed legislation was not illegal, it violated the principle of equality in taxation. “These tax benefits are essentially meant for the wealthy. They will help a very strong group that is represented by powerful lobbyists.”

Danny Overman, a representative of the non-profit organization Nefesh B’Nefesh, responded that “in our humble opinion this legislation is the biggest thing to happen to encourage aliyah from North America since Israel’s victory in the Six Day War.”

“I understand the Knesset legal adviser’s objections,” he continued, “but this is a matter of Zionist values, of encouraging aliyah. And with all due respect, maybe at some point in the future, we can address the issue of inequality, but today encouraging aliyah and strengthening the State of Israel is paramount.”

Representatives from the Ministry of Immigrant Absorption predicted the amendment would lead to a 30 percent increase in new immigrants and a 50% spike in returning residents.

Knesset Speaker Yuli Edelstein seen in the Knesset January 17, 2017. (Miriam Alster/FLASH90)

Knesset Speaker Yuli Edelstein seen in the Knesset January 17, 2017. (Miriam Alster/FLASH90)

MK Edelstein told the committee he foresaw “Israeli Ph.D. students and entrepreneurs in Silicon Valley” potentially returning to their homeland and improving the country’s “human capital.”

One of the lone voices of dissent during the Knesset committee hearings was University of Haifa tax law professor Yoseph M. Edrey.

“It’s one of the most shameful amendments that the Knesset has ever legislated,” he wrote later in a blog post. “It will not encourage young scientists to return to Israel. It will not bring productive enterprises or encourage investment here. What it will do is attract wealthy individuals, both Jews and non-Jews, whose sources of income are murky.

“These people will come to Israel so they can evade taxes in other countries.”

Who was right?

Were the proponents of the legislation, who said Amendment 168 would promote immigration and reverse Israel’s brain drain, correct, or were the naysayers, who said the amendment would attract tax evaders and worse, borne out in their predictions?

The Times of Israel contacted several government ministries and other organizations to discover what effect the amendment had actually had on immigration.

“We don’t have any data on that,” said Sabine Hadad, a spokeswoman for the Interior Ministry’s Population Immigration and Border Authority.

A spokesman for the Ministry of Immigrant Absorption also said he did not know.

Israeli Prime Minister Benjamin Netanyahu speaks as new immigrants from USA and Canada arrive at Ben Gurion Airport on August 04, 2009. The immigrants are part of Nefesh B'Nefesh (soul to soul) organization that brings immigrants from western countries to Israel. (Kobi Gideon / FLASH90)

Israeli Prime Minister Benjamin Netanyahu speaks as new immigrants from USA and Canada arrive at Ben Gurion Airport on August 04, 2009. The immigrants are part of Nefesh B’Nefesh (soul to soul) organization that brings immigrants from western countries to Israel. (Kobi Gideon / FLASH90)

“Not sure how much of an impact it has had on aliyah as we don’t have data of that specific kind. We definitely have olim in the 55+ age group who ask about it,” said Yael Katsman, spokeswoman for Nefesh B’Nefesh.

Israel’s Central Bureau of Statistics did not have specific data either, but sent a link to general immigration data for the past 10 years.

AliyahToIsraelPerYear

The results are inconclusive. While aliyah appears to have hit a slump in 2008, the year the amendment was passed, with only 13,701 new arrivals that year, the numbers rose slowly until 2014, when they hit 24,112, then hit 27,908 in 2015 and 25,010 in 2016. Did this increase in new arrivals have anything to do with Amendment 168? Maybe, maybe not. But the spike only began in 2014, five years after the law was passed.

When it comes to returning residents, the statistics do show an upward trend since 2008. In 2007, 21,100 left the country for more than a year and 9,300 returned, for a net loss to the country of 11,800 people. By 2014 the net loss had decreased to only 6,800 people. Does this improved ratio of returnees versus those who leave Israel have anything to do with Amendment 168? Only a more detailed study could provide answers.

Meanwhile, a widely reported 2016 study by international consultancy New World Wealth suggests that there is one cohort of people who have moved to Israel en masse and that is millionaires. The company’s survey of millionaire migration describes Israel as the fourth most popular destination worldwide for migrating millionaires in 2015, after Australia, the United States and Canada. The survey claims that 4,000 high-net-worth individuals relocated to Israel in 2015. Two thousand of them moved to Tel Aviv. The survey defined high-net worth individuals as people with over a million dollars in assets beyond their primary residence. Since the number of immigrants in 2015 was 28,000 and the number of returning residents was likely around 9,000, that would mean that approximately one in nine new arrivals to the country was a millionaire. However, local Israeli organizations that work with new immigrants have disputed the survey’s estimates, saying that in their experience immigrants to Israel are not that wealthy.

Leaving and returning Israel residents (Source: CBS)

Leaving and returning Israel residents (Source: CBS)

Tax lawyer Ori Drucker and CPA Tal Flembaum of the Israeli law firm of Dr. M. Drucker & Co. told The Times of Israel that, in their estimation, the number of millionaires who moved to Israel following passage of Amendment 168 is “several thousand.”

“We did not collect statistics,” said Drucker, “but from our experience a lot of Jews came from Western Europe and from North America. Some of them were fleeing anti-Semitism and others are wealthy Israelis who lived abroad for many years and wanted to come back here with their kids.”

In many cases, Drucker believes, the new immigrants and returning residents had thought about coming to Israel anyway and the tax exemption gave them an extra push.

Drucker compared Amendment 168 to the tax exemption the UK offers non-domiciled foreigners on foreign income. Russian oligarch Roman Abramovich, for instance, best known as the owner of the Chelsea Football Club, is thought to have benefited from non-domiciled status in the UK.

“Those tax breaks were good for the UK. When wealthy people enter your economic system they start to consume, they invest, they hire lawyers, accountants, bankers and advisers, and all these people pay taxes to the government.”

Teddy Sagi, pictured with supermodel Bar Refaeli (YouTube Screenshot)

Teddy Sagi, pictured with supermodel Bar Refaeli (YouTube Screenshot)

Drucker said that his wealthy clients, some of whom are extremely wealthy, have made tremendous contributions to Israel. Many invest in startups, helping boost Israel’s high-tech sector, while one new immigrant he knows of has launched an Olympic sports team here. Many also engage in philanthropy.

Asked to name some of his clients, Drucker politely declined.

“They are wary of the media,” Drucker’s associate Tal Flembaum explained. “From their point of view, there is no good publicity. Because then people will start asking, ‘why are they so rich?’ They have no incentive to be interviewed.”

According to media reports in Israel’s Calcalist daily and other publications, some of the wealthy people who moved to Israel as a result of Amendment 168 include the late Israeli shipping magnate Sami Ofer, film producer Milchan, online gambling and online trading tycoon Teddy Sagi, high-tech entrepreneur Shai Agassi, real-estate billionaire Sol Zakay, gambling tycoon Yigal Zilkha and porn payment processor Nathan Jacobson.

Singer Mariah Carey strolls hand-in-hand with her significant other, Australian businessman James Packer, in Capri, Italy, in June 2015. (screen capture: YouTube)

Singer Mariah Carey strolls hand-in-hand with her significant other, Australian businessman James Packer, in Capri, Italy, in June 2015. (screen capture: YouTube)

Interestingly, James Packer, the Australian gambling billionaire, whom Channel 10 News reported had wined and dined Prime Minister Netanyahu’s family and given them valuable gifts of cigars and champagne, is reported to be seeking permanent residency status in Israel, despite not being Jewish, so he can benefit from a tax exemption on his foreign earnings under Amendment 168. Packer’s friendship with the Netanyahu family, as well as that of his friend Milchan, has been the subject of media scrutiny in the context of several ongoing police corruption probes against the prime minister. Netanyahu denies any wrongdoing.

A tale of two cities

Has the influx of millionaires into Israel contributed to the rise in apartment prices? Since 2007, apartment prices in Israel have risen 114 percent, putting home ownership out of reach of 80% of Israeli wage earners who do not have large amounts of capital to begin with. Some observers have asserted that the sharp spike in prices is due, at least in part, to foreign money used to purchase investment apartments.

Tax lawyer Ori Drucker is quick to defend Israel’s millionaire newcomers from such accusations.

“Yes, they buy apartments, but they tend to buy high-end, luxury real estate. It’s a separate market.”

Luxury riverside apartments in London (dimitar_hr/iStock)

Luxury riverside apartments in London (dimitar_hr/iStock)

Both supporters and detractors of Amendment 168 have pointed to the UK, and specifically London, as an example of what happens when you attract a lot of foreign wealth into your country.

London is a global financial hub with top-notch lawyers and accountants as well as many oligarch-friendly laws on the books. It has been widely reported in British media that wealthy kleptocrats, and shady foreign tycoons are snatching up London real-estate, in many cases to hide the origins of their assets. The Financial Times has reported that the UK’s National Crime Agency believes hundreds of billions of pounds are laundered through the UK every year.

“The flood of offshore cash into the UK has had a highly damaging impact particularly on the London housing market,” George Turner, the UK-based director of Finance Uncovered, explained.

View of the luxury towers in the HaTzameret neighborhood of Tel Aviv. September 22, 2016. (Miriam Alster/Flash90.)

View of the luxury towers in the HaTzameret neighborhood of Tel Aviv. September 22, 2016. (Miriam Alster/Flash90.)

“In London, average house prices are now over 12 times average incomes,” he said. “This can only mean one thing, that the large amount of money buying up housing in the capital from abroad is pushing prices beyond the means of local residents.”

Turner said that often the homes are left empty, even as the city suffers a deep and prolonged housing crisis.

“In addition, the UK is increasingly seen as a haven for corrupt money and corrupt people. This does little for our international reputation.”

Could Tel Aviv be suffering a problem similar to that of London, and could the culprit for rising housing prices be foreign money, some of it dirty, entering the market?

Dr. Snir, economist at Bar-Ilan University, published a paper on this question in October 2014.

Snir used the modified cash-deposits ratio method, an approach employed by economists to assess the size of a country’s shadow economy, based on how much cash is in circulation, and calculated that between the years 2008 and 2014, Israel’s off-the-books economy grew from approximately 22% to 28% of the country’s GDP. This is an astounding jump, made all the more worrisome because the size of a country’s shadow economy is correlated with corruption.

Off-the-books transactions can be relatively innocent, albeit illegal, as when a babysitter is paid without a receipt, or they can point to criminal activity such as prostitution and drug sales. In both cases, attempts to disguise the source of income so you can spend it without government scrutiny are known as money laundering. Snir hypothesized several possible reasons for Israel’s massive increase in off-the-books transactions.

A view of the luxury apartments neighborhood of Mamila in Jerusalem, on October 27, 2015. Most of the luxury apartments are owned by foreign residents or by Israelis who use them as vacation homes.The city with the largest number of phantom apartments is Jerusalem, with an estimated 10,000 empty residential units. (Lior Mizrahi/Flash90)

A view of the luxury apartments neighborhood of Mamila in Jerusalem, on October 27, 2015. Most of the luxury apartments are owned by foreign residents or by Israelis who use them as vacation homes.The city with the largest number of phantom apartments is Jerusalem, with an estimated 10,000 empty residential units. (Lior Mizrahi/Flash90)

Snir first hypothesized that following the large-scale 2011 social justice demonstrations over the high cost of living in Israel, the average citizen became more price-conscious and perhaps sought ways to avoid paying the obligatory 17 or 18% value-added (sales) tax. Snir also hypothesized that organized criminal activity may have increased during this period, and found some evidence of this, but no smoking gun.

Finally, he turned his attention to the real-estate market. Snir concluded that foreign residents evading taxes abroad by purchasing Israeli real-estate likely accounted for only 2% of purchases between 2008 and 2014. His most surprising finding, however, was that a full 27% of Israeli residents who were buying an investment apartment (one that did not serve as their primary residence) had a reported household income of less that NIS 10,000 ($2,667) a month.

This income is so close to the poverty line that no bank would give them a mortgage, Snir wrote, concluding that many of these purchasers either had undisclosed assets or were serving as a front for people in Israel or abroad who wished to hide the fact that they were purchasing the property, an activity that constitutes a red flag for tax evasion and money laundering. Snir concluded that at least NIS 15.3 billion ($4 billion) of black money changes hands in Israel’s real estate industry each year and that the figure is probably much higher.

A graph by Noam Gruber of the Shoresh Institute showing how demand for apartments has changed (Courtesy Shoresh Institute)

A graph by Noam Gruber of the Shoresh Institute showing how demand for apartments has changed (Courtesy Shoresh Institute)

Meanwhile, a 2015 study of Israel’s housing market by Dr. Noam Gruber of the Shoresh Institute reveals that much of the increase in demand for Israeli apartments occurred from 2008 onward and that most of that demand came from buyers of investment apartments. Gruber believes this spike in demand has to do with low interest rates in the wake of the global financial crisis. Nevertheless, if as Snir suggests, the investment apartment market is swimming in black money, this could contribute to an explanation of the rise in housing prices.

Criminal aliyah?

Last November, Israeli police arrested 35 individuals for allegedly running a network of scam boiler rooms. The 35 people, from the ringleaders to the simplest salespeople, were charged with money laundering, aggravated fraud, conspiracy to defraud and misrepresenting their identity. They had allegedly operated secret call centers inside residential apartments in the cities of Ashkelon, Ashdod and Netanya, defrauding people in Europe and North America by a variety of ruses. One method was the CEO scam, where the alleged fraudsters impersonated senior executives in a European company and persuaded employees to wire money to the fraudsters’ bank accounts. Other employees allegedly called companies in Europe selling goods and services that never materialized. Some employees also allegedly lured customers into fraudulent forex and binary options investments.

“This is an elaborate and complex global affair that involves a very large number of suspects,” a government prosecutor told a judge during a hearing for two of the alleged salespeople, Hinaneet Williams and Melinda Knafo.

A Facebook ad for an Israel-based binary options firm posted April 19, 2016 (Screenshot)

A Facebook ad for an Israel-based binary options firm posted April 19, 2016 (Screenshot)

“The phenomenon has become a national scourge in both Israel and abroad. It is causing damage to the reputation of the state of Israel as well as to Jews in other countries.”

What was surprising about these arrests is that many of the suspects — salespeople, accountants, computer programmers and managers of the alleged scam operation — had such poor Hebrew that an interpreter was required to be present at their hearings. Many were recent immigrants to Israel from France and North America.

A lawyer for one of the suspects — Ben Hoffman, a 27-year-old new immigrant from the United States, who was suspected of providing IT services for several boiler rooms — pleaded with the judge at one of his hearings:

“My suspect is a new immigrant. His parents are in California and he has no family here. This is his first arrest. It’s hard to describe how difficult it is for a person who experiences the doors of jail closing on him for the first time. His Hebrew is weak and he is unable to cope with the smallest difficulties in jail.”

As readers of The Times of Israel may be aware, the arrest of 35 alleged Internet scammers by the Israeli police is the tip of the iceberg. Each day, thousands of Israelis — many of them young, many of them new immigrants — wake up and go to work in hundreds of call centers where they commit precisely the same crimes as the 35 boiler room suspects: misrepresenting their identities and conspiring to defraud customers abroad. The police has yet to arrest these thousands of scammers but there is no reason to assume they will not. Some of these call centers operate from apartments and pay their employees in cash. Others have offices and issue legitimate pay slips. Some sell fraudulent forex investments, others sell binary options, investments in “diamonds” or dodgy Green Card, locksmith and moving services.

French trader Arnaud Mimran arrives at the Paris courthouse on July 7, 2016 for deliberations in his trial over an alleged carbon tax scam.(AFP PHOTO / BERTRAND GUAY)

French trader Arnaud Mimran arrives at the Paris courthouse on July 7, 2016, for deliberations in his trial over an alleged carbon tax scam.(AFP PHOTO / BERTRAND GUAY)

Not to mention that one of the worst fraud cases in French history, dubbed “the sting of the century,” in which over 1 billion euros was stolen between November 2008 and June 2009 from French government coffers, was largely carried out from a Tel Aviv office, according to a Haaretz investigative report last June, by recent arrivals from France. Twelve defendants were tried last year in Paris for trading in carbon credits and collecting over a billion euros in value-added tax, which they stole, rather than handing it to the French government. Six of the defendants were tried in absentia and are believed to be living in Israel.

Within Israel’s community of recent immigrants (olim) from France, it is an open secret that a small percentage, perhaps several hundred, of the tens of thousands of immigrants who have arrived in recent years are underworld figures who moved to Israel with the express intention of continuing their criminal activity here. Many of these criminals set up call centers selling forex, binary options, or investments in fictional diamonds. These call centers then employ other immigrants, mostly young people, who moved to Israel with no intention of becoming criminals but are lured in by the high salaries.

In a May 2016 interview with The Times of Israel, Laurent Combourieu, director of investigations for the the Autorité des marchés financiers (AMF), France’s securities authority, said that there is overlap between the French-Israeli citizens who were involved in carbon-VAT fraud carried out against the French government from Israel, and the perpetrators of the current wave of online trading fraud targeting French speakers. In the past six years, the Paris prosecutor said in March, French citizens had lost 4.5 billion euros to online trading and CEO scams. Many of these, the AMF told The Times of Israel, though not all, were perpetrated from Israel. So far, a small number of alleged French call center scammers have been arrested, like the group of 35 people in November, but most continue to operate with impunity.

Laurent Combourieu, Director of Investigations for the AMF (Courtesy)

Laurent Combourieu, Director of Investigations for the AMF (Courtesy)

Could Amendment 168 have anything to do with the fact that a large number of French criminals decided to relocate to Israel since 2008? And the fraudsters are not just from France. A review of Israeli binary options firms that appear in the Panama papers reveal a large number of Israeli and Israeli-Arab owners, but many French, Russian and North American names as well.

Anecdotally, The Times of Israel has been told that among second-generation Israelis from Los Angeles who recently moved back to Israel, more than half work in binary options, some in senior roles. Several Italian immigrants to Israel told The Times of Israel that a large percentage of the several hundred young Italians who move here each year go to work in forex or binary options, and some even come to Israel with the intention of working in scam industries.

“It’s taboo in Israel to say anything against the Law of Return and encouraging aliyah,” said Moran Harari, director of Tax Justice Network Israel. “There’s a feeling we have to do whatever it takes to bring as many Jews here as possible.”

Moran Harari, director of Tax Justice Network Israel (Courtesy)

Moran Harari, director of Tax Justice Network Israel (Courtesy)

Nevertheless, Amendment 168, in its current formulation, makes Israel attractive to would-be criminals, she said.

Dr. Avi Nov, a tax lawyer and frequent blogger on tax issues believes there is a connection between people who moved to Israel from abroad and started binary options companies and Amendment 168.

“People don’t speak of it, but there certainly is a connection,” he told The Times of Israel.

“The entire binary options industry is offshore and this legislation integrates well with offshore companies. It gives you an option not to report your activity, which does not exist in any other country. In France or Italy, you have to report your earnings.”

Nov said that the amended law actually encourages newcomers to Israel to launch companies in the British Virgin Islands or the Cayman Islands as opposed to Israel.

“The law is telling them, don’t do your activity in Israel, if you do it in israel you’ll pay taxes. The law is saying, ‘go create companies in tax havens and we won’t tax it.’”

Canceling the exemption

Alarmed that Amendment 168 was giving rise to increased criminality in Israel, Israel’s state comptroller decided to do a random sampling of the bank accounts of new immigrants who had moved to Israel between 2008-2012.

Out of 600 bank accounts, 100, or one in six were found to have irregular activity that caused the bank to flag them for suspected money laundering.

In the conclusion to his 2014 report on the issue, the state comptroller wrote:

“The exemption from reporting and paying taxes given to immigrants and returning residents on the basis of amendment 168, has the ability to contribute to immigration and return to Israel. At the same time, granting a broad exemption from tax reporting is problematic, because it can provide an incentive to launder money or to use money that was laundered abroad, activities which may encourage crime and damage the integrity of Israeli society and the economy.”

Tax lawyer Dr. Avi Nov (LinkedIn)

Tax lawyer Dr. Avi Nov (LinkedIn)

Under pressure from the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, Israel agreed on May 19, 2013, to cancel the exemption from filing tax returns by new immigrants and veteran returning residents. Israel agreed not to cancel the tax exemption in its entirety, but merely the reporting exemption.

In 2014, the Global Forum wrote approvingly that “the legislative proposal is pending discussion by Knesset.”

But the discussion never happened. Each year since 2014, a provision canceling the reporting exemption has been placed before the Ministerial Committee for Legislation as part of the Economic Arrangements bill. Each year, the Minister of Immigrant Absorption, first Landver (Yisrael Beitenu) then Elkin (Likud) then Landver again, negotiated to have the provision removed from the bill before the other ministers could even vote on it.

Israel’s failure to keep its promise is not helping its reputation, Harari told The Times of Israel.

For instance, she said, in the latest (2016) International Narcotics Control Strategy Report (INCSR) issued by the U.S. State Department, Israel is listed as a “a major money-laundering country,” the most egregious of three categories, which it defines as one “whose financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking.”

The report adds that “Israel’s ‘right of return’ citizenship laws mean that criminal figures find it easy to obtain an Israeli passport without meeting long residence requirements. It is not uncommon for criminal figures suspected of money laundering to hold passports in a home country, a third country for business, and Israel. ”

A Rolls Royce car parked at the Tel Aviv-Jaffa Port, on November 15, 2014. (Nati SHohat/FLASH90)

A Rolls Royce car parked at the Tel Aviv-Jaffa Port, on November 15, 2014. (Nati SHohat/FLASH90)

Harari fears further international opprobrium if Israel does not cancel the reporting exemption soon.

“At present the EU is working on a list of blacklisted countries that are considered tax havens. I honestly have no idea if Israel will end up being on that list or not.”

Taxes and the cost of living

Israel has the highest cost of living relative to incomes of any OECD country except Japan, according to economists at the Taub Center. The high cost of housing has a lot to do with it. Do taxes directly affect the cost of living as well?

Certainly, says Nov. Not just this tax break, but most tax breaks are favors granted to the rich, said Nov, who wrote his doctoral thesis on the relationship between tax benefits and the influence of wealthy individuals on politicians. When the rich pay less in taxes, he said, the middle class pays more.

Illustrative: Tax haven (iStock)

Illustrative: Tax haven (iStock)

“Israel’s treasury recently published its estimate that it loses 50 or 60 billion shekels a year to tax benefits. If they cancelled all these tax favors, which are unjustified and have no economic basis, it would be possible to reduce the VAT to 10% and everyone would benefit.”

“Just imagine, he continued, your net salary would increase by a few hundred or a few thousand shekels and when you went to the supermarket instead of paying NIS 500 ($133) for your basket of groceries you would pay NIS 400 ($106).”

The problem said Nov is that the beneficiaries of tax benefits like Amendment 168 clearly benefit from them and lobby for them, while the loser, the average Israeli or middle-class new immigrant, is not paying attention and is not even aware of the reasons why her financial life feels like an uphill battle.

“The weak have no lobby. Tax benefits are as political as you get, and wealthy people work hard to have influence with politicians.”

Including, if allegations and media reports about would-be Amendment 168 beneficiaries Arnon Milchan and James Packer are to be believed, the prime minister himself.