Governor of the Bank of Israel Dr. Karnit Flug recommends "Imposing a general tax return filing obligation in Israel as a tool for enhancing compliance with tax laws." The recommendation was included in an excerpt published today from the Bank of Israel's Annual Report for 2013.
In Israel, the tax return filing obligation applies to companies and to self-employed individuals, while most employees and the rest of the population are exempt from filing a tax return. A general tax return filing obligation would mean the expansion of the obligation to file an annual return by applying it to all employees.
Expanding the reporting obligation to all employees aims to reduce unreported income and increase tax revenues, while allowing salaried employees to fully utilize their true tax liability, taking into account tax credits and expenses recognized by the Tax Authority.
Currently in Israel, the employer reports employees’ income, and makes at-source deductions of the taxes imposed on the employee and transfers them to the Israel Tax Authority. This is the method generally used in about half of the OECD countries. In the rest of the OECD countries, including the US, Canada, France, Denmark and Greece, the employee must file a return with the tax authorities at the end of each year. In this filing, the individual reports all sources of income and all expenses and deductions recognized as eligible for tax deductions.
In Israel, the benefits in respect of expenses connected with work are granted to employees through the employer, through the credit points system that give employees the benefits without the need for filing expense documents.
"Expanding the tax return filing obligation in Israel to employees will make it possible to change the existing tax system," says the Bank of Israel."Among the possible changes are altering the progressiveness of the tax system by instituting integrated taxation; expanding the policy of supporting working parents by deducting from taxable income childcare expenses that are actually paid; increasing the efficiency of the Earned Income Tax Credit by adjusting the credit amount to family income; and increasing the encouragement of professional development by deducting from taxable income the precise costs of academic and professional studies."
The Bank of Israel says, "Along with opening up new possibilities in the tax system, imposing a general tax return filing obligation will lead to additional costs, to individuals who are currently not required to file a tax return as well as to tax authorities. In the US, for instance, tax authorities have calculated that the estimated time required for each assessed person to fill out a tax return was about 14 hours. This is in addition to the time and resources devoted by the tax authorities to inputting the forms, only a tiny fraction of which are examined in the end."
In the US, it takes skill, accumulated over many years, to file tax reports. Presumably it will take more hours in Israel, especially during the first few years. However, the possible income, both in tax revenues and to individuals from a fairer recognition of expenses, should repay the costs.
To reduce time and resources, and possibly fears that the change will impose on the individual, the Bank of Israel advises "instituting a general reporting obligation implement a “declarative reporting” method using a pre-filled tax return, in which the tax authorities prepare the annual return on their own for each individual based on administrative data on that individual’s income. " The central database established for this purpose includes all income data received on each individual from various entities in the economy (banks, insurance companies, investment houses, and so on). Based on the information in the database, an automatic calculation of each individual’s tax bill is made, and the report is sent for the individual’s approval. This method has been instituted in full or in part in about 13 OECD countries where there is a general reporting obligation.
The obligation to file a general tax return has been under discussion for years. In 1998, an accountant petitioned the High Court of Justice against then-Minister of Finance Yaakov Neeman to institute the filing of an individual tax return on the grounds that the absence of a general obligation harmed him and the general public. Later, Neeman also began talking about the idea, and submitted a proposal to the government, in which he was a member, in 2009. He also called for the development of technological solutions and a simplification of the tax system. Former Israel Tax Authority director general Doron Arbeli made a similar proposal as part of the campaign against black capital.
Tax Authority officials have strongly opposed the idea for years, citing a range of arguments: the system of deducting tax at source was well developed; the public should not be burdened; and the creation of too much friction with taxpayers. The real objection was the work load on tax assessors.
However, it has become clear that not only has the black economy been steadily expanding, jeopardizing the future of tax revenues, because of growing public dissatisfaction with the tax burden and the non-recognition of work-related expenses. Moreover, the number of people working two jobs has increased, and they often do not fill out the annual tax adjustment form, ending up paying too much tax.
Many people fear individual tax filings. Tax offenders whom the authorities do not even know about fear being placed on lists at the tax assessors, which is liable to expose them and force them to disclose income and pay taxes they do not normally pay. But these are precisely the people in the black economy who should be targeted. On the other hand, it is possible that the extra burden on the population might benefit them and allow them to pay more just taxes.
Published by Globes [online], Israel business news - www.globes-online.com - on March 19, 2014
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