The effective tax rate paid by Israeli small businesses is higher than the effective tax rate paid by big companies, in complete contradiction of the policy norm in most OECD countries, according to a position paper by Advs. Hadass Sharim and Ariel Dreifuss of CPA firm UHY Shtainmetz and Aminoach & Co. The study found especially wide differences in Japan and South Korea, where the difference in the statutory tax rate was 15% and 13%, respectively. In countries like France and the US, the effective tax rate paid by small businesses could be a much as 20 percentage points less.
Many countries in the world also allow dragging losses backwards, and not just forwards as in Israel. The range usually ranges from one year (for example, in the UK) to three years (for example, in the US) retroactively. A company that had a good year and paid taxes on its revenue, can offset subsequent losses from the profits in that year, and receive a tax refund on actual profits that subsequently disappeared in the following years.
"Israel has a uniform companies tax, and the main way to reduce it is through the Law for the Encouragement of Capital Investments, which mainly benefits big companies, which have the resources to apply the mechanisms for implementing the law," say Sharim and Dreifuss. "This results in the contrary situation in which big companies can reduce the effective tax burden levied on them (albeit at the cost of bureaucracy, they can absorb the price because of their size and they get it back through the reduction in their tax burden), whereas small companies are stuck with the full bureaucracy for dealing with tax issues, and the full tax burden."
According to State Revenues Administration data from early 2012, Israel's effective tax rate was 20.5% in 2009 (the latest available figures), compared with the regular companies tax rate of 26%. Almost all of the difference is because of tax breaks in the Law for the Encouragement of Capital Investments.
Sharim and Dreifuss say that the current situation "is liable to cause economic inequality, which is also reflected on the social side in the form of protests against the high cost of living, and in terms of compliance with the law, since many businesses will probably seeks ways to bypass the law to lower their tax burden, which they believe that the big companies do. Many studies have shown that easing the tax burden, simplifying procedures, and transparency of the tax system result in greater compliance by ordinary people, increase the state's revenues, and benefit people who can invest more resources and time in developing their businesses instead of wasting time and resources in complicated dealings with the tax authorities."
Sharim and Dreifuss say that, in June 2012, a new bill was proposed to set a differential companies tax rate of 20% on annual income of up to NIS 1.2 million, and 30% on annual income over this amount, instead of the present uniform 25% rate. They say that the proposal would reduce the tax rate paid by 90% of Israeli companies by five percentage points, while raising the tax rate on 5,000 big companies. 80% of the companies tax is collected from these companies, which will pay10-30% above the current tax rate, but similar to the prevailing tax rate in the past decade.
Despite many ad campaigns to which the public is being exposed to in the media to encourage small businesses, the bill is stuck, and a differential companies tax rate is not on the agenda.
Published by Globes [online], Israel business news - www.globes-online.com - on December 23, 2012
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