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 Israeli Tax Ordinance (that deals with deductions that should not be granted), stating that: “payments, whether given in cash 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 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 illegally4 the payment in itself is legal and therefore will be deductible).

With respect to the wide discretion 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 whether to open an investigation in this case a decision from the head of the inquiries and intelligence department is required (after he has informed the Attorney General in his decision), whilst in our case the tax assessor is qualified to establish reasonable basis without having to get consent from a higher jurisdiction.

As we can see, this wide discretion was given to the tax assessor without any clarifications or guidelines to follow. It may lead to a result where a civil tax assessor decides on criminal matters. It is in our opinion, that that was not what the legislator was aiming for and therefore the tax assessor must proceed with much caution when dealing with this subsection.