Israeli Tax Alerts | Practical Interpretations | 2008-2020

70 Illegal Will no longer be Deductible As part of the global combat against harmful practices in the area of taxation, Israel has been joining the OECD efforts in this area. Following the OECD Convention on Combating Bribery and the OECD Report on the implementation of this Convention by Israel (March 19, 2009), a specific Draft Law Amendment 170 to the Income TAX Ordinance ("ITO") was published on June 1, 2009. This Amendment is a complementary step to the Criminal Code amendment of 2008 that prohibits bribing a public servant and a recent landmark court decision that prevents the deductibility of illegal payments to foreign public servants. According to the 170 Bill it would be prohibited under the Oredinance to deduct bribery expenses - whether they are cash or in kind expenses. The actual wording of Amendment 170 refers to "payments, whether performed in cash or in kind, where there is a reasonable basis to assume that providing these payments constitutes an offence according to any law " (free translation - O.R.). It may certainly be assumed that the phrase "any law" includes other jurisdictions, due to the fact that the explanatory text of the Draft Law discuss the global effect of bribery payments and the general and worldwide efforts to face this harmful phenomenon. This Amendment, if accepted, may provided the ITA with very wide discretion in classifying certain expenses as illegal per-se. (July 2009) Deductible Expenses - not on illegal payments In continuation with our last tax news alert ( no.5 ), regarding the bill proposal to prevent the deductions of illegal payments as a recognized expense for tax purpose, we would like to inform that, On November 26, 2009 subsection (16) was added to article 32 of the Ordinance (that deals with deductions that should not be granted), stating that: " payments, whether given in cash money or money equivalent, that have reasonable basis to assume they constitute an offense under any law" . To be clear, the tax authority should enforce this subsection only when the payment in itself is illegal (such as in bribery payments), and not when there is an illegal act that is associated to the payment (for example: paying an employee that is staying in Israel illegally- the payment in itself is legal and therefore will be deductible). With respect to the wide jurisdiction range given to the tax assessor, in classifying certain expenses as illegal per se, we think that the implementation of such power should be much more complex. For comparison, in section 291a of the Penalty law that talks about bribery, in order to establish the bribery offence, consent from the Attorney General is required (a power that up until today was not delegated to another persona). Moreover, in order to determine