Every business is required to maintain accounting books and receipts from the first day of operating the business. Bookkeeping depends on the type of business. The rules for bookkeeping are found in the Income Tax regulations (Management of Account Books).
Many business owners and taxpayers find themselves in a situation where they have been assessed a judgment by the auditors at VAT offices or tax inspectors at the tax assessor’s offices. This is based on their conclusion that the business results of a taxpayer/business owner are unreasonable for his industry or that he did not maintain proper accounting records.
The normative framework
The authority to conduct a tax assessment according to the best of judgment is vested in the VAT Administrator pursuant to Section 77 of the Value Added Tax Law, 5736-1975, as well as to the Assessing Officer pursuant to Section 145 of the Income Tax Ordinance (New Version), 5721-1961.
These laws establish a mechanism whereby the trader/taxpayer may dispute the assessment and obtain a refund within 30 days of the date the assessment notice was served on him, or within a later date permitted by the taxing officer.
Also, if the VAT Director or the tax assessor rejects the submitted assessment, in whole or in part, the trader/taxpayer may appeal the Director’s decision before the District Court.
To refute an assessment according to the best of one’s judgment, one must rely on actual evidence.
A business/taxpayer who is found not to have kept proper accounting records in his business may be exposed, as part of an audit conducted by the Tax Authority, to the determination of an assessment based on best judgment. In addition, it is possible for the VAT manager or tax assessor to conclude that the income of a business/taxpayer in relation to his expenses is unusually low compared to the data of business/taxpayers operating in the same line of business, over time and without reasonable explanation. In such cases, an assessment based on best judgment may be determined. The tax assessment may reach extremely high tax liability amounts, without any connection to the actual income and expenses of the business, since this assessment is unable to reflect and accurately reflect the expenses and income of the business, since the assessment is not evidence-based, but at the same time it is based on hypotheses, assumptions, and must be faithful to the business and the circumstances of the case, and it will be examined through the professionalism of the VAT manager or tax assessor.
A best-judgement assessment should be based on real evidence and data and should not be arbitrary, excessive, or unfounded . A best-judgement assessment is an informed guess based on expertise.
An assessment, according to the best of judgment, does not punish the trader/taxpayer. The court gave its opinion on this, saying:
“According to the best of judgment, an assessment is not intended to punish the taxpayer who fails, but rather to promote the determination of true tax.”
(AA 5324/05 Bashir Nabhan Shahada v. Acre Tax Collector).
The court’s intervention in the assessment according to the best judgment
An assessment according to the best judgment should be considered a verdict for all intents and purposes. The appeal against the postponement of the acquisition will be filed with the District Court, which will hear it before a single judge who will be entitled to appoint advisors as appropriate.
As a general rule, the court will not rush to step into the shoes and discretion of VAT administrators and tax assessors, even when the assessment is given by guesswork and conjecture. The court’s intervention is not in the matter of determining the assessment itself, but rather in the matter of procedure, error in law, disregard of actual facts. A business owner’s claim that the assessment given to him is unfounded and arbitrary must be supported by objective evidence, as well as by the degree of proof required in civil law, that the assumptions on the basis of which the tax assessor determined the tax assessment are unreasonable.
Recently, the court addressed the issue of conducting an assessment according to best judgment and ruled that just as the VAT administrator expects that a business’s business results will be reasonable, when the administrator reaches the conclusion that the results presented to him are not reasonable and therefore decides to conduct assessments according to best judgment, then his assessments according to best judgment should also be reasonable and be based on proven and solid foundations. In the matter of Opel Leshem Holdings Ltd. (Case No. 22007-06-13 Opel Leshem Holdings Ltd. v. Value Added Tax Administrator – Haifa) which was given on August 24, 2015 (not yet published), the court ruled that:
” A valuation based on the best judgment issued by the manager in the circumstances that justify it cannot be a casual valuation – “a guess from the finger”, but must be based on some reasonable data… A valuation based on the best judgment does not have to be precise, since it is not based on precise evidence, but it must be as faithful as possible to the circumstances of the case.”
And later the verdict ruled that…
“The manager must use the knowledge and expertise available to him to determine the assessment.”
Professional legal advice in the early stages of the procedure may necessarily change the picture . An objection to assessments, according to the best of judgment, should be substantiated with actual reasons with relevant references to the reasons for the assessment, while addressing each of its sections individually. Therefore, it is important to submit the objection within the period prescribed by law. There are situations in which a request for an extension to submit the objection can be submitted, but sufficient reason is required for this.
