Israel Tax Authority Director General Moshe Asher said that Israel in the last decade has become one of the world’s “most generous tax havens” as a result of a 2008 law known as Amendment 168 to the Tax Ordinance.
The law, nicknamed “the Milchan law” at the time of its passage in 2008, gives new immigrants and returning residents to Israel a complete exemption from paying taxes on income earned abroad, and even on reporting that income, for a period of 10 years. Asher has been trying to cancel the reporting exemption since becoming Tax Authority chairman in 2013 but members of Israel’s governing coalition have repeatedly nixed these efforts, he said.
Supporters of the current law, including Immigration and Absorption Minister Sofa Landver, argue that it has in fact attracted many new immigrants to Israel and that countries like the UK and Italy have similar laws on their books.
Asher, however, stands behind his assertion that the law turns Israel into a tax haven without parallel.
“What characterizes a tax haven is that a) one doesn’t pay taxes and b) there is an exemption from reporting one’s income,” he told The Times of Israel in an interview. “In Israel we have something extra. We have an expansive network of tax treaties with developed countries that a typical offshore tax haven does not have.”
In other words, explained Asher, an immigrant can move to Israel, earn interest, dividends or other income abroad and effectively pay no taxes anywhere on that income.
“He would pay no taxes abroad because of the tax treaty with Israel, and no taxes in Israel because of the law here,” he said.
Amendment 168 to the Tax Ordinance has been in the news lately in connection with one of the various police graft probes against Prime Minister Benjamin Netanyahu. Netanyahu has been accused by Israeli police of trying to extend the exemption from 10 years to 20 for businessmen Arnon Milchan and James Packer in exchange for gifts of cigars, champagne and jewelry totaling NIS 1 million ($287,000).
Milchan is considered a returning Israeli, who would potentially have saved a fortune had the tax amnesty been extended; Packer was reportedly seeking to become a new immigrant.
Asher said the income reporting exemption in Amendment 168 is problematic because it is a secrecy measure that does not allow Israel to uphold its international commitments to share tax information with other countries.
“Today we are in a new global era of exchange of information between tax authorities and transparency,” he said. “These are the global standards today and we can’t be left behind. This law does not allow Israel to exchange information in a complete and transparent way.”
Asher added that Israel’s law is more far-reaching than that of other countries and that he believes the law has attracted new immigrants and returning residents who moved here for reasons that are less than patriotic.
“There are some people who come to Israel for tax purposes,” he said. “We are starting to hear about people leaving Israel after the 10-year tax exemption is up, which makes you realize they came here for tax reasons. It’s possible that some of these people did not fully report their income and assets in their countries of origin, whether in that country or a third country.”
Asher said that if Israel cancels the reporting exemption, such tax evaders may leave the country or not move here in the first place.
Israel has become a magnet for millionaires
Andrew Amolis, a South African economist who studies the migration patterns of the very wealthy for New World Wealth, a global market research group, said that Israel has consistently been one of the world’s top destinations for millionaires for the past several years, with thousands of high-net-worth individuals moving to the country each year.
“Israel is a very safe country and offers strong business opportunities for high-net-worth individuals,” he told The Times of Israel. “Taxation there is also more reasonable than in Europe, where over-taxation has become the new norm.”
“A handful of countries,” Amolis further elucidated in the 2017 Knight-Frank Wealth Report, “including Canada, Malta, the United Arab Emirates, Qatar, Monaco and Israel, as well as Australia and New Zealand – enjoyed significant growth in their ultra-wealthy populations during 2016. What these countries share is the ability to attract migrating high-net-worth individuals and to offer a fiscal and political ‘safe haven’ as well as excellent quality of life.”
But Israel’s tax haven status is attracting negative attention from the OECD and other international bodies.
At a February 26 panel of the Knesset State Control Committee, Israel’s Chief Economist Yoel Naveh described how he and Asher received letters from the World Bank and the European Bank for Reconstruction and Development (EBRD) in 2014 stating that if Israel did not step up its compliance with international anti-money laundering standards, the two global bodies would refuse to do business with the Jewish state.
“In October 2014 the Global Forum on Transparency and Exchange of Information for Tax Purposes did a peer review of Israel and we got a whole list of problems with Israel’s tax regime,” Naveh said during the committee meeting. “Amendment 168 was one of the issues that came up. As a result, the Global Forum said that Israel was only ‘partially compliant’ with the international standards.”
The Global Forum is an international organization of mostly OECD countries dedicated to combating tax evasion, tax havens, offshore financial centers and money laundering. As a member, Israel has signed numerous information exchange treaties with other countries.
Asher said that the World Bank and EBRD have not followed through with their threats, but that the current situation, where Israel has still not canceled the reporting exemption, is unsustainable.
“We are not meeting the standards of the OECD,” he said. “Each time we undergo vetting by the OECD this comes up. I think that the moment you are a member of the OECD you are obliged to meet their standards.”
Jonathan Hoffman, a London-based former official with the Bank of England and Credit Suisse, outlined potential consequences if Israel fails to meet such standards.
“If the European Bank for Reconstruction and Development and the World Bank had announced that they were blacklisting Israel, it would almost certainly have caused the rating agencies to downgrade Israel and the country’s bond issuance to become more expensive,” he said.
Asked what that would mean for the average citizen, Hoffman replied, “Taxes might have to rise to pay the higher debt servicing, or expenditures cut. So GDP growth would be slower and unemployment higher.”
‘We are not legislators’
Asked what he had done to fix the law, Asher said, “The professional echelons can recommend legislation, but we are not the legislators. Since 2013 we have been recommending this constantly.”
Landver, the immigration minister, who has publicly opposed changes to the law, said, “The purpose of this law is to encourage immigrants and returning residents to immigrate to Israel. All other interpretations are unacceptable to me.”
Asher worries that Israel’s failure to change Amendment 168 will also affect other countries’ willingness to share information with Israel.
“We don’t need to be a global tax haven; in the end it will hurt Israel,” he said. “If we are thought of as a tax haven, we will get treated accordingly. Other countries won’t share information about Israelis who invested abroad.”