International Taxation- Dr. Tsilly Dagan- 2009
By Chaim Grushko
Special Thanks to Tobie Harris for making this possible.
These notes are to be supplemented by the charts, graphs, and handouts which were distributed in class.
Class 1:
Introduction:
Tax based on תושבות will create an even distribution of the tax burden (נטל). Under this doctrine it does not matter where the money was earned. This doctrine also creates incentive to invest abroad. (Reasons that this is bad: low tax revenue, local citizens are made to pay more, not efficient, not fair.) This is also a type of benefit tax in that the residents are the ones to benefit so they should be the ones to pay (but, benefit tax does not really exist anywhere and the doctrine that is used is tax based on ability to pay).
The United States is the only country that taxes based on citizenship.
Israel – What is considered תושבות?
The determining factor is finding where is the person’s מרכז חייב.
The factors that are considered are economic, family, and personal activities.
There is a חזקה that if someone is in Israel for more than 183 days a year, they are considered תושבים. (This חזקה can be disproven.) People are often times confused by the מט"ח law which contains a dry rule that 183 days in the country making someone a תושב. When it comes to tax, this rule is only a חזקה.
פס"ד אריה גונן- Aryeh lived in Israel until 1988 with his family then moved to חול with his family and worked there. During these years he paid ביטוח לאומי to Israel and his children returned to Israel to serve in the army when the time came. In 1992 Aryeh moved back to Israel with his family. The question is; Was Aryeh considered a תושב ישראל during the period that he was in חו"ל and is his income taxable in Israel during that period? The Supreme Court ruled that תושבות is not binary and the answer is comprised of many factors. In this case for that period the מרכז חייב was in חו"ל because his whole family was there and the actions that he did in Israel was just to maintain a “foothold.”
פס"ד גיורה סולר- Giora was an architect who worked abroad for 4 years and during that time filed tax returns in Israel. The court ruled that he is not a תושב ישראל for that period because you must examine his מרכז חיים and that is abroad.
Some people are under the impression that the rule is that if you are abroad for 3 years, you are no longer considered a תושב ישראל but such a rule does not really exist.
Should a country be clear or vague about its rules concerning תושבות?
Vauge- you can catch more people and מהות is preferred over צורה when this is the rule.
Clear- People will not be freaked out and afraid and not keep any ties when they move away from the country out of fear of being considered a תושב.
The תושבות of Companies- "מקום שליטה וניהול"
To determine this you must figure out:
-Where are the decisions actually reached? Is the person who is really in charge in Israel and making the decisions here even if the leadership of the company is abroad? (you can get around this by actually having the decision making go on abroad.)
Competition for תושבים and תיקון 168:
תושבים (especially companies) are very mobile.
Companies decide on where they will be only based on financial interests.
People are emotional and have loyalty and decide things based on that.
The most mobile people are the rich, talented, and young (they are also the most desireable for a country to get their hands on.)
Why do countries want תושבים?
Corporations- if their administration is in a country that requires a lot of other infrastructure like lawyers and expensive neighborhoods (herzilia).
Individuals- Nationalistic reasons (Israel wants Jews), a country wants the best and brightest minds, and residents are consumers.
תיקון 168: How to get foreign money (both new money and Israeli money that has left)
If you live in Israel then your foreign investments are tax free for 10 years (and then we just hope that you fall in love with the place and stay here).
Although we would prefer getting the tax money on these investments, we are not losing anything by having the people here and there is a lot being gained. (some argue that there are downsides such as the large income/ societal gaps, it is unfair that rich people don’t have to pay taxes, it rewards people who leave Israel and then come back, and these are not the highest quality citizens.)
This תיקון does not require people to even report their foreign income to Israel. (this created a situation that was good for really shady deals.)
Class 2
Double Taxation- There are different ways in dealing with this (circumstance- two countries tax the same income.) There are different ways that this is avoided and the country that generally arranges it is the country in which the person is a תושב and not the host country where the money is being made.
Options for taxing foreign earnings- In order of awesome for the taxpayer.
1. פטור )Exemption)- If income was taxed once, it will not be taxed again. (best for the citizen.)
2. זיכוי(tax coupon)- you must make up the difference between the foreign and domestic tax rate.
3. ניקוי (deduction)- You will have to pay the full Israeli tax rate on the income less the amount of tax that was paid to the foreign country.
4. Double Tax- You will pay tax twice on the same income with no recognition by each country of the tax that was paid to the other.
The incentive to invest in chul is higher if the residence country has the more awesome option.
Neutrality- allows for the most economically efficient decisions.
1. Capital import Neutrality (CIN)- All (tsua) returns produced in a country get the same tax rate. It doesn’t matter where the person who is doing the investing lives. (Here people will live wherever is best for them.)
2. Capital Export Neutrality (CEN)- I will invest in whatever country is best for me. Because everyone pays the same tax rate on returns, the investor will choose the country to invest in with the highest rate of return.
3. National Neutrality (NN)- The country where you live will be neutral so long as it doesn’t hurt the country.
CEN supports זיכוי- because the end tax rate is always the same.
CIN supports a פטור, if everyone gives a פטור- because you will only pay taxes to the foreign country because it doesn’t take into account the tax rate in the country where you live.
NN supports ניקוי- because it is only efficient to invest abroad if your net return after tax abroad would be higher then your gross return (before tax) Israel.
*So trying to find the most neutral option doesn’t help because there are different types of neutrality that all lead to different tax doctrines.
What Israel chose to go with is זיכוי.
Sif 200: definitions (requirements for the זיכוי)
· “מס Chutz-” the tax is only on income and you don’t get a זיכוי for the money that you expended on taxes for things like arnona. The exemption is only for taxes paid in the foreign country in which the income was earned (US citizen, Canada Earned, Israel resident example).
· Only if Israel considers the revenue to be income will the tax paid to the foreign country be subject to זיכוי. It has to be something that falls under one of the mekorot of Israeli income tax law. (This means that we have a game where we put as much of the income that is taxes abroad as income earned abroad and would otherwise be subject to Israeli income tax as far as Israel is concerned.)
Sif 204: There is a limit to the זיכוי (תקרת זיכוי) which is (it is unnecessarily complicated because of tax brackets so we will just get a specific tax rate) that your זיכוי is:
If I earn 1000 in chul, 2000 in Israel and you would have to pay 900 tax in Israel then the זיכוי would be 300 because 900 X 1000 / 3000 = 300. But if the amount that would have to be pain in the foreign country is 500 then you would still only get the זיכוי on 300 and you would have a 200 odef זיכוי that would still have to paid again in israel (because Israel is nice, but not that nice). An Odef זיכוי can be used for up to 5 years as a זיכוי to make up the difference between the amount of tax paid to the foreign country and the amount of the תקרת זיכוי).
Based on this definition it is obvious to make as much income as possible look like income from chul because then the tikrat ha זיכוי would be all that much higher. This lends to all sorts of schemes where income will be recognized as foreign. Different types of income have different rules and there are different games played. For instance for services- the location is where the service is rendered but for royalties it is wherever the royalty is being paid. So if I make a computer program I will say that it is IP that I am licensing and not a service that I am providing. The real trick is that Israel will think of it as IP and America will think of it as a service so I won’t have to pay in Israel or America. Another trick is to manufacture here and have it sold in chul by a marketing company who I sold it to for a slight profit so that all the profit is earned in chul.
Regarding תקרת זיכוי- when Israel is 10%, spain is 20%, and france is 30%- the תקרת זיכוי is neutral between Israel and spain but not neutral between france and spain.
And then the Germany- הוןg Kong- Israel Chart.
(Shiur 3)
So why would we have a זיכוי if it takes the tax money out of the mouth of Israel and helps other countries?
Because we want residents and we are willing to sacrifice a certain amount of tax revenue in order to get them to live here. (but only until a certain amount- זיכוי mugbal- means that the other country can not raise its tax rates above Israel and then Israel be expected to absorb the difference in cost.
(If the host country wants to get the most out of the pocket of a resident country (that uses a זיכוי) they will impose a soak up tax- but most countries will void whatever arrangement there is if a host country imposes a soak up tax and they will no longer give the זיכוי at all.)
CHART!
SALIM BASKETS- Sif 199 and 204: We make distinctions based on those presented in sif 2 and between revach peiruti and הון. Under the CHozeh מס Hachnasa it can be broken down into even smaller categories. What this does is create specific categories for which the govah tikra of the זיכוי is applied and the tax that must be paid is the higher of the two (foreign tax or Israeli tax on the same amount of income). This serves to defeat the Averaging Method (the averaging method consists of…) of getting around the תקרת זיכוי.
If there was a basket by country, that too would serve to defeat the averaging method for getting around the תקרת זיכוי. See chart for details and numbers.
(CLASS 4)
How can I still get around the salim basket using the averaging method where I would otherwise be limited in my ways of getting around the תקרת זיכוי?
1. I can set up the active business (more difficult because it involves factories and stuff) where I need more זיכוי in countries with lower taxes. This is as opposed to setting up just the passive in places with low tax rates (which is the easy part- just moving money).
2. MIXER- set up a company that owns companies all over the place that come together somewhere that will average all of the incomes to one place. That one central company will then pay dividends to the Israeli mother company and that would save the mother company from an imposed restriction on the averaging method.
-This only makes sense in the context of זיכוי akif. For זיכוי akif there is no salim baskets so all I have to do is set up the subsidiary abroad and I get tax benefits as if there is nothing preventing the averaging method.
זיכוי Akif is a way of preventing a situation of double taxation where a parent company in Israel gets dividends from a subsidiary abroad and that subsidiary paid taxes to the foreign country on the money before dividends were paid out and the parent company must then pay tax to Israel on the dividends that it received. So זיכוי akif is a way of getting a זיכוי on taxes paid by a subsidiary. (If the subsidiary earned 1000, paid taxes 300, gave the parent 700 and the tax rate in Israel is 40% then the parent would only have to pay an additional 100.)
So you can use this method of mixer to get a זיכוי akif to get around the limitations of the salim baskets by having your subsidiary mix income from places with higher and lower tax rates and you get a זיכוי on everything that does not differentiate between baskets.
Tax deferral- being able to control the time at which you will pay tax. This can be very useful in circumstances of different tax rates in different countries (sometimes).
Go to charts
Bermuda Sandwich- a way to get a tax deferral.
Go to charts
The corporation that is set up in Bermuda is a CFC (controlled foreign corporation) or in Hebrew CHNA”Z (chevra nishletet zara).
The CFC in Israeli law is dealt with in sif 75b2(1): a baal shlita in a CFC that has profits that are not paid out to the investors as dividends are seen as if received to the portion that he would have received had it been paid (this means that there is no reason to keep the money in the company but rather to pay it out as dividends to the baalei shlita). This means that that money will get taxed at this stage and you cannot do tax deferral.