Israel's economy has managed to remain somewhat steady despite the global economic downturn. At the same time, the prime minister announced in July 2012 the government's intention to increase taxes and cut spending to sustain itself through what is expected ...
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Israel's economy has managed to remain somewhat steady despite the global economic downturn. At the same time, the prime minister announced in July 2012 the government's intention to increase taxes and cut spending to sustain itself through what is expected to be a slow year for the economy.
On January 1 2011, the government cut Israel's corporate tax rate by one percentage point to 24%. This has gone back up to the original 25%, despite plans to gradually decrease it in small increments.
Even after the rise in the corporate tax rate, the government is trying to provide incentives to attract businesses to Israel. "They want to provide incentives for exporting companies; if you are an exporting company you pay 6%-12% corporate tax instead of 25%. If you are in the development zone in Israel, tax on dividends is 15% instead of 25%," said Yaniv Shekel from Shekel & Co.
"A special emphasis should be put on the new version of the Encouragement of Capital Investments Law (commencing 2011) – which according to our opinion, in most cases increases the incentive for foreign companies to operate and establish branches in Israel," said Noa Lev Goldstein from Eitan Mehulal & Sadot. "Moreover, a temporary order related to the Encouragement of Capital Investments Law, which is supposed to come into force before 2013, is expected to affect many Israeli and foreign companies who operate in Israel, and facilitate their possibility to distribute dividends with lower tax rate."
Value added tax (VAT) will rise to 17% from 16% on September 1 2012. Though the increase is small, it imposes a further burden on taxpayers. VAT was perhaps the most viable option for the government to raise revenue quickly, however. "It's the easiest to increase VAT because it does not require a long legal procedure," said Yigal Rofhe from Grant Thornton.
Another angle the government is focusing on is wealth taxation . Capital gains tax on stocks and bonds was 20%. This year, the rate has been increased to 25%. This is in addition to a new wealth tax, which was enacted on August 6 2012 and will take effect from January 1 2013. Under the wealth tax, 2% of all income and capital gains more than NIS800,000 ($200,000) is now taxable.
The year has seen other tweaks to the tax regime. Changes to existing taxes are expected, though in small steps, as the elections that were anticipated for October 2013 have been pushed back a year.
Similar to another global trend, Israel has tried to recover undeclared income of Israeli taxpayers through voluntary disclosure. "One thing that has grown is a voluntary disclosure programme that has been going on around bank accounts in Switzerland. If you know this area, after USA actually sued UBS and introduced a voluntary disclosure program for US persons with bank accounts in Switzerland, Israeli tax authorities are doing the same," said Tal Atsmon from Goldfarb Seligman & Co.
In late 2011, the Israeli Tax Authority (ITA) introduced a temporary voluntary disclosure procedure that will end on September 27 2012. This is an anonymous way for Israelis to declare and pay previously undisclosed income and assetsheld abroad .
"After September, according to the ITA, they will not have any more extensions to the voluntary disclosure programme and will start criminal procedures for anyone they find," said Atsmon.
Israel has always been a popular location for start-up high technology companies. However, the ITA has recently made an interpretation relating to VAT that may impose additional tax burdens on internet companies. Traditionally, these businesses that were "foreign residents" did not have to register for VAT and if an entity resident in Israel supplied services to a foreign resident by it was able to benefit from 0% VAT. The ITA has interpreted that the term of foreign resident no longer applies if the company provides services to Israeli clients. This will have an impact on many foreign internet companies that have set up branches or subsidiaries in Israel.
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