Israeli Tax Research Articles

Does Public Accreditation Promote More State-Friendly Decisions at the Street Level?

When public administrators resolve disputes between citizens and other state officials, are they truly impartial? The question is imperative for evaluating resolutions made by street-level bureaucrats whom citizens often perceive as the face of public administration. This study examines the relationship between public accreditation and the tendency of street-level bureaucrats’ resolutions to accept the state’s arguments or the citizens’ claims. Using quantitative analysis of administrative lower-court rulings in Israeli tax disputes, the findings link public accreditation to state favoritism in street-level resolutions. Such an outcome, if not accounted for, may jeopardize procedural fairness and erode public trust in government.

Israel—tax update

Abstract A public committee was established in the field of international taxation with the aim of providing recommendations to simplify and provide certainty and efficiency to the Israeli tax system. The report was submitted in November 2021 and dealt with various areas. This article will present relevant recommendations from the report that have not yet passed the relevant legislative procedure.

Courts Again Side with Israeli Taxpayer in Transfer Pricing Business Restructuring Ruling

In April 2019, the authors published in the International Transfer Pricing Journal an article that addressed, inter alia, OECD and Israeli principles of business restructuring, focusing on the various resulting models, such as outright sale and licensing structures. Subsequently, however, the authors published a revisit to this topic in October 2020 as an Israeli tax court reached a legal countering decision. The current article considers this detailed background as well as the most recent court developments in this regard in a May 2022 ruling.

Does appealability foster more citizen‐friendly decisions at the street level?

AbstractUnbiased conduct is an essential part of the social contract between the state and its citizens. Yet, when tasked with settling disputes between citizens and other state officials, are public administrators truly impartial in their resolutions? Such a question is vital for street‐level bureaucrats whom the public perceives as the face of governance. This study investigates the relations between the pro‐citizen tendencies in street‐level bureaucrats' resolutions, their internal appealability, and the discretionary space under which they are made. Using quantitative analysis of real‐world lower‐court rulings in Israeli tax disputes between 1980 and 2021, the research findings indicate that unregulated expansion of street‐level bureaucrats' discretionary space relates to favoring the state's arguments in their resolutions and may impair procedural fairness. The findings also imply that regulation promoting citizens' right to appeal such resolutions within their agency, can increase street‐level bureaucrats' pro‐citizen tendencies and potentially counteract such outcomes.

Who pays for and who benefits from minimum wage increases? Evidence from Israeli tax data on business owners and workers

A key goal of a higher minimum wage is income redistribution towards low-income families. Existing research on the minimum wage focuses on the impact on affected workers, but is silent on the incomes of the owners of businesses who pay for a higher minimum wage. Higher minimum wages will do more to redistribute income if the owners of businesses who pay the minimum wage are nearer the top of the income distribution, and vice versa. We study evidence on the incidence of the minimum wage on the incomes of business owners using a unique administrative dataset on the universe of tax records for Israel, in the period surrounding a large minimum wage increase. We find that the minimum wage hike reduced profits of companies, with minimum-wage intensive companies bearing the bulk of the cost and adjusting their workforces more aggressively. Notably, profits declined more for lower-income business owners. Moreover, owners of businesses with higher shares of minimum-wage workers ranked at the bottom of the income distribution of business owners. In addition, spouses of business owners earn less than the owners while minimum wage workers have higher earning spouses, further reducing the redistributive effect of the minimum wage.

Revisiting Business Restructuring in Light of Israeli Court Decisions and Circulars

In April 2019, the authors published in the International Transfer Pricing Journal an article that addressed, inter alia, OECD and Israeli principles of business restructuring, focusing on the various resulting models, such as outright sale and licensing structures. Since then, however, an Israeli tax court has reached a legal decision that changes the landscape and this article will therefore revisit certain transfer pricing aspects of business restructuring in Israel.

The Effect of the Macroeconomic Environment on Judicial Behavior: The (Surprising) Case of Israeli Tax Litigation

Does the macroeconomic environment affect judicial decisions and thereby shape the law? Even though the normative significance of understanding judicial decision-making is undeniable, empirical research into how judges make decisions is woefully incomplete. This is the first Article to empirically examine the stabilizing fiscal potential of judicial decisions in tax disputes. In this Article, I use empirical methods to test whether macroeconomic conditions—namely, the business cycle—affect the outcomes of judicial decisions in tax cases. Theory prescribes either an anticyclical response to the business cycle or no response at all. I test this hypothesis with a novel dataset I constructed using judicial decisions made by specialized tax judges from the district courts of Israel before and after the 2008 financial crisis. The evidence suggests business cycles affect judges’ decisions in tax disputes. But counter to the theoretical prediction, judges favor the tax authorities during economic downturns and favor the taxpayers during economic upturns. This procyclical decision-making pattern may exacerbate economic instability.

The Wage Response to a Reduction in Income Tax Rates: The Israeli Tax Reform

Abstract This study examines the effect of an income tax reform on wages. An Israeli reform implemented in 2003–2009 reduced individuals’ marginal income tax rate by 7–17 percentage points. We utilized the differential and non-monotonic marginal tax rate reduction, and used Israel Tax Authority panel data of wage earners, merged with Labor Force Surveys. We found that in the business sector, the elasticity of reported gross wages relative to the net-of-tax rate is about 0.1. The wage earners in the lowest wage quintile were not affected by the tax reform, those in the second and third quintiles did not respond to the tax cut, but elasticity increased with wage, reaching about 0.4 in the upper decile. We did not find statistically significant differences in elasticity by gender, ethnicity, or education.

The Israeli tax reforms in the 1970s as socially oriented reforms

ABSTRACTThe income tax reform in Israel that was introduced in August 1975 bridged two ostensible objectives: the enlargement of levying and the provision of a redistributive mechanism. In other words, it aimed to establish a system that would simultaneously achieve economic efficiency and social justice. The reform was unique since it invented an original Credit Points mechanism that linked together efficiency and distributive justice.Introducing the Value Added Tax a year later was also justified as an indirect progressive tax that could be related to as a business tax rather than as an expenditure tax, levied directly on customers. One of the main concerns of the leading academic economists during that period was the enlarged socio-economic gap. Hence, the two tax reforms were also justified by pro-social arguments.

Migration of Intellectual Property from Israeli Technology Companies

In this article, the authors highlight the strength of the Israeli technology market and the upswing of foreign investment in Israel in various forms (e.g. acquisitions or the establishment of subsidiaries). They review the Israeli tax incentives for maintaining intellectual property (IP) within Israel, as well as both the OECD and Israeli principles of business restructuring, addressing the various resulting models, such as outright sale and licensing structures.

Unemployment following breast cancer diagnosis: A population-based study

ObjectivesThe population of breast cancer survivors is growing. In Western societies, many of these women are working age, and therefore, potentially desire to return to the work force. We aimed to evaluate the unemployment risk for up to 8 years following a breast cancer diagnosis and identify contributing socio-economic factors. MethodsThis historical prospective study included baseline measurements from the Israeli Central Bureau of Statistics 1995 National Census, with follow-up to 2011. We retrieved data on employment from the Israeli Tax Authority database and cancer status from the National Cancer Registry. A control group without cancer was selected to match the patients. Analyses were controlled for socio-economic factors and the baseline employment status 2 years prior to diagnosis. ResultsWe retrieved data for 2341 patients with breast cancer and 6837 age-matched women without cancer. We found an elevated risk of unemployment during the 8 years after breast cancer diagnosis (2-year OR 1.82, 95%CI: 1.59–2.075; 8-year OR 1.26, 95%CI: 1.07–1.47). Age and all examined socio-economic variables were correlated to increased risk of unemployment. The strongest predictor was pre-diagnosis unemployment (2-year OR 18.95, 95%CI: 16.68–21.52; 8-year OR 4.92, 95%CI: 4.07–5.96). Surprisingly, patients with axillary involvement were associated with less risk of unemployment than other patients. ConclusionsBreast cancer survivorship was associated with long-term risk of unemployment. Older patients and patients with lower socio-economic status were at increased risk of unemployment.

Empirical Analysis of Israeli Tax Litigation: Measuring the Effect of Social Background on Judicial Decision Making

Judicial decision making constitutes an important part of the law in every country and judges’ decisions are expected to follow the law in its correct meaning. Do judges act this way or there might be non-legal factors that affect their decisions, and hence the law? The positive research of judicial decision making is expanding, whereas its normative significance is undeniable. This study contributes to this strand of research, as it empirically evaluates if, and to what extent, non-legal factors affect judicial decisions in income tax cases. It examines potential effects of judges’ social background and thus joins, and adds to, the empirical literature on tax litigation which is rather small. It is also the first empirical research regarding the Israeli judiciary that uses econometric methods for estimating the effect of non-legal variables on judicial decision making in tax cases.A central methodological innovation, suggested in this study, stems from the unique coding of the dependent variable – the Case's Outcome – as an ordinal variable, rather than the common coding of judicial decisions as binary. Accordingly, an ordinal regression model is the suitable methodology for estimating an ordinal variable, rather than applying the commonly used logistic regression model. Furthermore, binary coding of judges’ decisions is in many times arbitrary, causes loss of information, and may result in misestimation.This study finds that judges' gender, seniority, age at time of nomination and age at time of decision affect judges’ decisions, and hence the law in Israel.

Higher incidence of screening-related cancers in the employed population.

Employment may confound the risk of a cancer diagnosis in both directions. We hypothesized that a higher baseline rate of employment among cancer patients may explain the lack of association between a cancer diagnosis and later unemployment in many studies. To assess the unemployment rate among cancer patients before diagnosis compared with a matched cancer-free control group. Using data from the Israeli National Central Bureau of Statistics 1995 census (persons aged between 15 and 60 years old), the Israeli Tax Authority database and the Israel Cancer Registry, cancer patients (diagnosed between the years 2000 and 2007 and alive at 2011) were compared with matched cancer-free controls. There were 8797 cancer patients and 26166 cancer-free controls. We found that, in general, cancer was not associated with unemployment 2 years before diagnosis (adjusted odds ratio [OR] = 0.96, 95% confidence interval [CI] 0.90-1.009, P = NS) after adjustment for age, gender, ethnicity, educational years and residential socioeconomic position. However, the diagnoses associated with screening (breast, prostate, colorectal and cervix cancers) were inversely associated with unemployment 2 years before diagnosis (adjusted OR = 0.90, 95% CI 0.84-0.97, P < 0.01). The results from the current study suggest that a higher baseline rate of employment among cancer patients, mainly those who were diagnosed with screening-associated cancers, explains false negative results in previous studies assessing cancer survivors' work issues.

Impact of FATCA on Israeli Trust Structures

Israel is going to exchange financial account information with the USA and, eventually, other countries as well. As a result, it is imperative that all trusts be certain of their status under the Foreign Account Tax Compliance Act (FATCA). On 1 August 2016, the Finance Committee confirmed Israel’s Regulations (‘Regulations’) implementing the FATCA Intergovernmental Agreement (IGA) signed between Israel and the USA in 2014. A request was filed with the Israeli High Court of Justice in January 2016 seeking to prohibit the Israeli tax authorities from sharing details of financial accounts with the US Internal Revenue Service (IRS). The Court denied that request on 12 September 2016. As a result, Israeli trust structures, if they have not done so already, must determine which entities in the structure have FATCA registration, due diligence, and reporting requirements.

What Does Compensation of Portfolio Managers Tell Us about Mutual Fund Industry? Evidence from Israeli Tax Records

We study the determinants of compensation in the mutual fund industry using Israeli tax records. The portfolio manager compensation is influenced by fund flows driven by past raw returns. Managers are thus paid equally for fund superior performance and for the fund’s passive benchmark returns. We interpret these results though a model that combines trust-mediated money management in the spirit of Gennanioli, Shleifer and Vishny (2015) and imperfect labor market competition. In our model, compensation and fund size are jointly determined by expected raw returns and by the level of intermediary’s trustworthiness. Additional empirical evidence confirms the distinct model predictions.

The Effects of Permanent Income Tax Cuts on Emigration from Israel

In this paper we introduce an analytical framework for analyzing the effect of permanent income tax reductions on emigration and conduct an empirical analysis of their impact, based on the Israeli tax reductions during 2004-2010. We find that permanent tax reductions reduce the emigration flows from Israel. According to our findings, this effect is stronger for workers in the low-tech sector than for their high-tech counterparts, as the former appear to be more sensitive to changes in net wages. Moreover, the effect is stronger for younger workers who benefit from permanent tax reductions for a longer period during their careers, relative to older workers.

Tax Authorities Publish Draft Circular on Internet Activity of Foreign Companies

A recent draft circular issued by the Israeli tax authorities sets forth their views on the application of existing rules and tax treaty provisions in the ever-evolving digital economy.

The Israeli Tax Authority's Voluntary Disclosure Procedure

The Israeli Tax Authority's Voluntary Disclosure Procedure

Taxation of Trusts in Israel: trustee's reporting obligations

The Israeli Taxation of Trusts Law, effective as of 1 January 2006 (the ‘Law’) has taken a while to be implemented. Due to recurring postponements, mainly resulting from the Israeli Tax Authority’s preparation for the implementation of the Law, the last and final filing deadline was 31 December 2009. The reporting for 31 December 2009 relates to the years 2006–2008. During the current 2010 year (April 2010) the filing of reports for the year 2009 is required. Although the deadline of 31 December 2009 has passed, it is possible that an extension may be granted if the circumstances require. The Law imposes reporting and tax obligations on the trustee of each trust. This fact is irrespective of the jurisdiction of residency or jurisdiction of business activities of the trustee. In other words, all trustees, worldwide, of trusts that have a certain connection to Israel, are subject to the Law, based...

Couples Taxation in Israel: A Call for Separate Taxation

English Abstract: The Article examines the joint taxation of couples in Israeli tax law and its consequences on women's rights and participation in the market field. The article discusses the relations between social norms and legal rules. It calls for adopting separate taxation of couples.