It flies in face of global anti-money laundering standards

What is the ‘Milchan Law’ that Netanyahu is accused of advancing for bribes?

Police say PM sought to accelerate amendment on tax exemptions for new immigrants; critics say law has helped turn Israel into a paradise for tax evaders and money launderers

Simona Weinglass is an investigative reporter at The Times of Israel.

Arnon Milchan, left, and Benjamin Netanyahu on March 28, 2005. (Flash90)
Arnon Milchan, left, and Benjamin Netanyahu on March 28, 2005. (Flash90)

For more than a year, it has been widely reported that police were investigating Prime Minister Benjamin Netanyahu in connection with gifts of cigars and champagne from businessmen Arnon Milchan and James Packer. But it was unclear — if the prime minister were to be charged with bribery — what exactly the police believed Netanyahu had offered in return.

But unveiling their long-anticipated recommendations for indicting Netanyahu, police on Tuesday finally revealed a key missing piece of information: The central favor they believe Netanyahu provided both Milchan and Packer, in exchange for gifts totaling NIS 1 million (NIS 750,000 shekels from Milchan and NIS 250,000 from Packer), was an attempt to alter a little-known tax exemption law known as Amendment 168 to the Tax Ordinance.

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 former prime minister Ehud Olmert.

However, the law flies in the face of international anti-money laundering standards and each year for the past several years the finance minister has tried to abrogate it. But each year the effort to cancel it is scuttled, putting Israel in danger of being placed on international sanctions lists.

Amendment 168 grants a 10-year tax exemption on income earned abroad to new immigrants as well as to returning residents who have lived abroad for at least 10 years. In addition, the amendment gives those eligible a 10-year exemption on reporting earnings abroad.

Police now believe, based on the testimony of former finance minister Yair Lapid, that Netanyahu sought unsuccessfully to extend the exemption to 20 years, on behalf of Milchan and Packer.

Yesh Atid party leader Yair Lapid leads a Yesh Atid faction meeting at the Knesset, December 11, 2017. (Yonatan Sindel/Flash90)

“I will emphasize that despite all the pressure against me, I refused to pass the law,” Lapid said in a Tuesday night statement.

While the amendment has probably helped some struggling new immigrants get on their feet during their early years in Israel, that wasn’t its 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 last year. “The new law definitely gave a nudge and a wink to people who had dirty money and wanted to launder it.”

Read: Did a little-noticed tax exemption law turn Israel into a criminals’ paradise?

Under the right circumstances, a beneficiary of the law can end up paying no income tax whatsoever. The law has been taken advantage of by many individuals involved in the online gambling, forex and binary options industries, who typically will register their company in places like Cyprus or the British Virgin Islands and therefore pay no taxes on income from their enterprise, as long as the ultimate beneficial owner is a new immigrant or returning resident. What’s more, when foreign law enforcement officials seeking to investigate such alleged criminals turn to their Israeli counterparts, the authorities here may not be able to provide them with information on their finances.

One of the lone voices of dissent during the Knesset committee hearings prior to passage of the original amendment 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.”

Millionaire migration to Israel

Andrew Amolis, a South African economist who studies the migration patterns of the very wealthy for New World Wealth, a global market research group, told The Times of Israel that Israel has consistently been one of the world’s top destinations for millionaires for the past several years — many of them from France.

“Israel is a very safe country and offers strong business opportunities for high-net-worth individuals,” he said. “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 the law has attracted criminals as well.

Several thousand French new immigrants to Israel are said to be making their living working in boiler rooms and perpetrating various types of scams against victims abroad. More than ten thousand Israelis, many of them new immigrants, are employed in such fraud industries, which include fraudulent online gambling, binary options, CEO scams, forex, diamond scams, cryptocurrency scams, lead-generation scams and many others.

Alarmed that Amendment 168 was giving rise to increased criminality in Israel, Israel’s state comptroller in 2014 decided to do a random sampling of the bank accounts of new immigrants who had moved to Israel between 2008 and 2012.

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

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

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.”

Under pressure from the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes, Israel agreed in 2013 to cancel the exemption from filing tax returns by new immigrants and veteran returning residents — though not the tax exemption itself. 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 Sofa Landver (Yisrael Beytenu), then Ze’ev Elkin (Likud) then Landver again — negotiated to have the provision removed from the bill before the other ministers could even vote on it. Last week, the provision was once again removed from the Arrangements Bill.

The Times of Israel contacted the Finance Ministry, the Justice Ministry, the speaker of the Knesset and the Tax Authority, as well as spokespeople for Finance Minister Moshe Kahlon and coalition chair David Amsalem, but was unable to ascertain who was responsible for scuttling the provision.

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

For instance, she said, in the 2016 International Narcotics Control Strategy Report (INCSR) issued by the US 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.”

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