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Who is trapping our profits?

This is how the top 1% are trying to fudge the reform that will make it difficult for them to evade paying taxes, and to impose new taxes on all of us. Report from the Knesset

By Maayan Galili

Editor Shany Payes

Translation using Google Translate with minor edits by Lior Suchoy

Date of original publication: 24/12/2024

Original Hebrew text: https://www.rosamedia.org/episodes/articles/62

Of all the treasury penalties [see comment below – LS] meant to finance the war within Israel’s budget for 2025, one proposal is supposed to work in the interest of the majority of the public at the expense of the top 1% - a bill to tax the trapped profits, which has been debated in the Knesset in recent weeks. We have come to the Knesset for you, to understand how the top 1% are using their tools to thwart the only law that slightly tilts the distribution of the burden from the majority of the public to the top 1%.

The name " trapped profits" refers to profits that companies keep and do not distribute to their owners [as dividend – LS] so that the owners avoid paying tax on them. Therefore, this bill is meant to collect "real tax" [מס-אמת; the amount of tax owed without manipulation or avoidance – LS] - that is, it is not a tax increase, but a fair collection of the tax predetermined by law. To avoid paying the tax, many company owners hold "wallet companies" - companies whose entire function is to be registered as owners of [other – LS] companies with real economic activity, and in which the profits are kept. There is a significant difficulty for the state authorities to identify trapped profits. According to the proposal, owners of companies with high levels of profitability - 25% or more - will be charged a marginal tax on the profits so that the incentive to hold such companies will disappear. This section particularly affects self-employed people with high incomes such as lawyers, private doctors and consultants in various fields. In addition, in "sparsely owned companies" [חברות מעטים – LS] - companies that have less than five owners and do not conduct significant economic activity - undistributed profits will be taxed at the rate of 2% per year.

The bill was supposed to bring five billion shekels into the state coffers each year, and ten billion shekels in 2025. This is a large amount of great importance in building the state budget in the coming year. In various publications in the media, representatives of The Treasury said that if the reform does not pass, regressive penalties will be passed in its place, which will harm the majority of the public instead of justly taxing the upper classes.

Those who follow money politics in Israel will not be surprised to learn that indeed, following pressure from the business sector against the law, The Treasury compromised on many sections of the bill. According to recent media reports, a much lower amount [of tax - LS] will be collected, which is also attributed to a "miscalculation" by The Treasury. To close the gap, the Treasury is offering temporary tax benefits that will increase the state's revenues in the short term, and it is possible that new penalties will be enforced on the general public.

The reform [i.e. the bill – LS] should have a disproportionate effect on the top 1%. 83 per cent of the new revenues for the state budget are expected to come from taxing them. Accordingly, organisations that represent groups that will be particularly affected by the law have organised to prevent the passing of the law. Two debates on the reform reached the brink of an explosion last week - one on Wednesday and the other on Monday, after representatives of companies and other economic entities who oppose the reform raised new reservations. MK Naama Lazimi said on the subject to Rosa Media - "The conduct of the lobbyists of the business sector during the discussions on the issue of trapped profits revealed a goal-oriented and sometimes forceful style. In some cases, they tried to apply pressure to the point of derailing the discussions. This aggressiveness shows the close connection between the economic benefits they defend and the interests of the big companies."

Representatives from the Institute of Certified Public Accountants in Israel (ICPAS), the Institute of Tax Consultants in Israel (ITCI) and the Presidium of the Business Sector in Israel (PBSI) participated in these discussions. Those organisations will be represented, among other things, by lobbyists who enjoy a deep familiarity with the tax structure in Israel and with the politics of the tax laws, because they held various positions in the Tax Authority [the government branch in charge of taxation – LS] until recently. Among other measures, PBSI hired the lobbying services of Moshe Asher, who served between 2013 and 2018 as the head of the Tax Authority, to [advocate its position – LS] during the discussions on the new bill. Roland Am-Shalem, who served as Deputy Director of the Tax Authority until last year, represented ICPAS. In the debate held last Thursday, Knesset member Yinon Azulai, who presided over the debate, jokingly and directly referred to the fact that Am-Shalem "switched sides", from the Tax Authority to those it is meant to tax. Such a reference demonstrates how normalised this situation is, and how blatant the conflict of interests it expresses.

During the discussion in the committee, MK Orit Farkash-Hacohen from the National Union party [see comment below – LS] expressed a certain scepticism towards the reform, and even attacked MK Simcha Rothman, who argued in favour of the reform. "You preach about the taxing “wallet companies” and at the same time in your committee [the Constitution, Law and Justice committee – LS], you promote the [so-called] “rabbinic law” which will allow the Minister of the Interior to pay as much as the like to rabbis and members of [local – LS] religious councils. Considering the proposed budget by the government, it is better that the money stays with them [with the “wallet companies” – MG] than it goes to the Abrachim [ultra-orthodox adult students of religious texts – LS] and to subsidise childcare [for the ultra-orthodox religious communities; see comment below – LS] ". Using rhetoric from the world of anti-corruption and calling for the separation of church and state, Farkash-Hacohen contributes to the struggle of the capitalists to avoid paying a fair tax.

Among the reservations raised during the discussions on the bill, substantive claims were also raised regarding the way it affects various entities, and the protection of small companies from arbitrary taxation as a result. To address these issues, special mechanisms were developed and established for entities such as partners in law firms. However, substantive claims can also be part of a general effort to fudge the reform. Any delay in passing the reform plays to the advantage of those it aims to tax. Ofir Peer, a lobbyist for the Lobby 99 organisation [NGO which aims to lobby for the public interest – LS], told Rosa Media: "The powerful interest groups and the lobbyists of the top 1% have a clear strategy in the discussions. They are trying to postpone the vote on the law as much as possible, partly by going back on the agreements they have already reached." As far as The Treasury is concerned, the law must be passed by the end of the year, which gives opponents of the reform effective leverage against it. According to Peer, "Since this is tax legislation, if the law is not passed by the end of the year, it will not apply to the 2025 tax year, so they are pushing the treasury into a corner with the aim of being more flexible in negotiations, introducing loopholes in the law and receiving tax benefits and gifts instead of paying “real tax” according to the intent of the law". In this sense, even when substantive objections and reservations arise, they may serve the same strategy. It seems that bringing the debate to the brink of an explosion on Monday, following new demands that did not arise before from the representatives of The Treasury, fits nicely with this strategy.

This is how the representatives of the opponents [to the bill – LS] succeeded in extorting various exemptions and benefits from the law, among other things for agency companies, which were excluded from it. In addition, in the agreements reached last week by the representatives of The Treasury and the representatives of the opponents of the reform, the opponents obtained an alternative route for the companies, in which they will be able to distribute six per cent of the profits and pay a dividend tax on this percentage, in order to avoid the two per cent tax on retained earnings. This is a lower percentage than the eight per cent that The Treasury wanted to charge in the first place, and it was even agreed that companies would be able to choose between the "tracks" every year, instead of every four years as initially demanded by The Treasury. These compromises create a price [which is – LS] lower income for the State, a gap that is meant to be covered through a "special discount" to [allow – LS] the liquidation of wallet companies under particularly profitable conditions [for their owners – LS], including discounts on the acquisition tax on real estate. Thus, even within the framework of a reform aimed at increasing taxation on them, the upper classes were able to use their political power to obtain tax benefits for themselves. At the discussion in the Finance Committee on Thursday, Kfir Battat, the representative of The Treasury, told MK Naama Lazimi that even after the compromise with the representatives of the opponents of the law, the income to the state coffers should remain similar in scope. This statement is only true on the assumption that the "special discount" - an additional tax benefit, which was not discussed with the elected officials [i.e. committee members – LS] – is carried out. And in view of the conduct surrounding the bill for the taxation of the trapped profits, this is questionable.

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