Provisions of the Law and Regulations
The Law establishes the conditions under which a business may be considered a “resident of the Eilat area” for the purpose of receiving the tax incentives designated for businesses in the city. A central condition for receiving these benefits is registration as a VAT taxpayer in Eilat, as outlined in Section 1 of the Law:

“A resident of the Eilat area” is defined as:
(1) An individual whose permanent residence is located within the city of Eilat or the Eilat area and has resided there for at least three consecutive months before requesting an incentive under this Law;
(2) A person (as defined in the Ordinance) who operates a business in the Eilat area – in respect of that business, provided they are registered in Eilat as a VAT taxpayer concerning that business, and under other conditions specified.”

Furthermore, the regulations enacted under the Law outline the administrative requirements related to registration, including the obligation to separate the accounting books and reports of the Eilat-based business from those of transactions conducted outside of Eilat.

Tax Benefits for Businesses in Eilat
The Law provides several significant tax benefits for businesses in Eilat. The primary benefit is the exemption from VAT on the sale of goods and services within the city. This exemption is designated for businesses operating in the city that conduct transactions for business purposes within the city. The Law, however, lists specific goods and services that are not eligible for this exemption. Among these exemptions are private vehicles, motorcycles, televisions, cigarettes, jewelry of high value, and others.
In addition to the VAT exemption on sales or services conducted within Eilat, the Law also provides a VAT exemption on the importation of goods to Eilat, provided they are intended for consumption or sale within the city. In cases where goods are imported to Eilat via another port, VAT must be paid at the time of importation, after which the business operator may apply for a VAT refund from Eilat Customs, in accordance with the provisions outlined by the Law and the regulations.

VAT Registration Requirements for Businesses in Eilat
To qualify for the tax benefits, any business operating in the Eilat area must be registered as a VAT taxpayer in Eilat. As the cornerstone of all the benefits granted to businesses in the city, registration as a VAT taxpayer in Eilat is a constitutive requirement that is essential for recognizing the business as a “resident of the Eilat area” and for eligibility to receive the tax benefits. As clarified in rulings by the courts, registration with VAT in Eilat is not merely a formal act, but is substantive and has a direct impact on a business’s eligibility to receive the tax benefits provided under the Law.

The Requirement for Separating Accounting Books and Reports
In addition to registering as a VAT taxpayer in Eilat, businesses are required to separate their accounting books and reports between business activities conducted in Eilat and those outside of Eilat. According to Regulation 2(a) of the Eilat Free Trade Zone Law, a business operator who conducts business activities outside of Eilat must maintain separate records for their Eilat business. This requirement ensures that the tax benefits granted to businesses in Eilat are not exploited improperly.

Consequences of Failure to Register as a VAT Taxpayer in Eilat
Failure to register as a VAT taxpayer in Eilat has significant consequences. A business that is not registered with VAT in Eilat cannot be considered a “resident of the Eilat area” and will therefore not be entitled to the benefits provided under the Law. Failure to register may result in substantial loss of tax benefits, including exemption from VAT on the sale of goods and services within the city of Eilat. Any business that fails to meet the requirements of the Law and the regulations may find itself exposed to retroactive tax liabilities and delays in the process of receiving benefits.

Legal Rulings and Their Implications
In rulings issued by the Supreme Court, particularly in cases such as Israir Airlines and Tourism Ltd. v. Eilat Tax Authority and R.D.M.P. Zman Oir Ltd. v. Eilat Tax Authority, it was established that registration as a VAT taxpayer in Eilat is a constitutive condition for eligibility for the tax benefits. These rulings emphasized the need to separate business activities conducted in Eilat from those carried out outside the city and clarified that a business cannot be recognized as a “resident of the Eilat area” if it has not complied with the essential requirements of the Law at the relevant time. Additionally, it was made clear that failure to register in a timely manner prevents eligibility for retroactive benefits, even if the business is substantially operating in the city.

Retroactive Implications of Failure to Register
According to the rulings of the courts, failure to meet the registration and separation requirements may lead to a business operator being unable to benefit from the tax incentives retroactively. The court ruled that registration as a VAT taxpayer in Eilat is not just a technical measure but a substantive condition that defines the business’s economic connection to the city of Eilat. Therefore, a business that has not met the administrative requirements in a timely manner cannot be recognized as a resident of the Eilat area. These rulings establish the principle of oversight and prevent improper use of benefits.

Conclusion
The Eilat Free Trade Zone Law provides businesses in Eilat with a series of significant tax benefits, but they must meet the registration requirements specified in the Law and regulations. Registration as a VAT taxpayer in Eilat is a necessary condition for eligibility for these benefits, and failure to comply with this requirement may lead to the denial of benefits and retroactive tax liabilities. Additionally, businesses must ensure the proper separation of their accounting books between activities in Eilat and those outside the city to maintain the integrity of the Law’s objective – the economic development of the city of Eilat and the reduction of tax distortions.

Ish-Shalom & Co. Law Office specializes in analyzing and understanding the legal and financial aspects of the Eilat Free Trade Zone Law, particularly regarding VAT matters and the registration requirements for VAT taxpayers in Eilat. Our office offers professional, comprehensive services with extensive experience in tax law and an in-depth understanding of VAT regulations and the special benefits available to businesses in Eilat.

We assist our clients in avoiding complications and maximizing the advantages offered by the Law for businesses operating in the area.

Should you have any questions or need legal consultation regarding taxes and benefits for businesses in Eilat, our office is at your service with tailored solutions and the highest level of professional advice.

Definition of Pre Ruling and Legal Authority for Issuing Advance Tax Rulings
A Pre Ruling is a process in which a taxpayer submits a request to the Tax Authority for an answer regarding a tax issue that does not have a clear answer in the tax laws or existing tax circulars. This process provides the taxpayer with absolute certainty regarding the tax implications of an action or transaction they are considering, allowing them to plan their steps intelligently and make optimal strategic decisions.

The authority to issue advance tax rulings stems from the legal provisions of Sections 158b to 158v in Part 9 of the Income Tax Ordinance, which grants the Director of the Tax Authority the right to issue tax rulings on various issues related to future transactions. These sections stipulate that the Director of the Tax Authority may provide an official response to the applicant, which will have legal validity, but may not necessarily be published publicly.

Advantages of Using Pre Rulings

1. Tax Certainty: The primary advantage of the Pre Ruling process is the ability to obtain a clear and unequivocal answer on ambiguous tax issues. In cases where the provisions of the law are unclear or require specific interpretation, this process enables the taxpayer to know in advance the expected tax liability in a transaction or action, which can save unnecessary expenses and even prompt renegotiation if the potential tax burden makes the transaction unfeasible.
   
   
2. Effective Tax Planning: Through Pre Rulings, corporations, multinational companies, and individuals can plan their business steps in the most efficient way regarding tax liability. Large entities that need to make strategic decisions regarding future moves can rely on an advance tax ruling to know with certainty the financial implications of these moves.
   
   
3. Cost and Time Savings: This process reduces the risk of additional expenses by maintaining transparency with the tax authorities. By doing so, it avoids exposure to extra costs such as interest and linkage adjustments that may arise in a regular assessment process. Additionally, because the tax rulings are given in advance, the applicant can understand the expected tax liability and influence the feasibility of the transaction or action.
   
   
4. Transparency with the Tax Authority: The Pre Ruling process operates transparently and openly with the Tax Authority, reducing the risk of unnecessary audits or future tax investigations. This enables the taxpayer to carry out their transactions or actions in an orderly manner, fully aware of the tax implications.
   
   

The Process of Submitting an Advance Tax Ruling Request
Submitting a request for an advance tax ruling requires the applicant to provide all relevant documents, including the details of the transaction or action they wish to perform, which have tax implications. Upon receiving the request, the Tax Authority must give the applicant the opportunity to present their arguments and provide additional information as needed.

After the ruling is issued, if it is given under an agreement, it cannot be appealed. However, if it is not part of an agreement, the applicant may appeal the ruling as part of an appeal on the tax assessment. In any case, the Tax Authority is obligated to act in accordance with the ruling unless it is revealed that false or incorrect information was provided.

The Legal Status of an Advance Tax Ruling
An advance tax ruling is not a contract between the parties, but it holds legal validity and obligates the Tax Authority to act accordingly. However, if the taxpayer chooses to act in a manner inconsistent with the ruling, they are required to explain this deviation in their financial reports.

Summary
The Pre Ruling process is an important and useful tool for taxpayers who wish to avoid uncertainty regarding the tax implications of their actions. Using advance tax rulings helps taxpayers – whether small businesses, medium-sized enterprises, or large corporations – make informed decisions, reduce financial risks, and optimally manage their tax liabilities. Moreover, these rulings assist in maintaining transparency with the tax authorities and avoiding unexpected economic consequences in the future.

Ish-Shalom & Co. Law Office specializes in representing taxpayers before the professional departments of the Tax Authority, providing expert advice and representation in tax matters, including assisting with the submission of advance tax ruling requests while ensuring privacy and offering personalized advice to guarantee the best outcome for clients. We would be happy to assist you with these processes and other matters related to taxes and representation before the Tax Authority.

If you have any further questions or need assistance with the Pre Ruling process, I am here to help!

The Legal Framework
The legal basis governing VAT refunds in Israel is the Value Added Tax Law, 1975 (the “VAT Law”). Section 49 of the VAT Law permits the correction or cancellation of a VAT invoice when a transaction has not been completed, is canceled, or when there is an error in the invoice. This section particularly applies in cases where the customer has not paid the consideration or has not paid the full amount.

According to Regulation 24A of the Value Added Tax Regulations, 1976, a claim for a VAT refund on a bad debt may be submitted if the application is filed within three years from the date the VAT invoice was issued. Regulation 24A(c) further stipulates that the VAT refund will only be granted if the debt is deemed bad and it must be proven that all efforts to collect the debt, including legal actions such as enforcement, bankruptcy proceedings, or debt write-offs under a creditors’ arrangement, have been exhausted by the business.

Conditions for Recognizing a Debt as a Bad Debt for VAT Refund Purposes
The process for claiming a VAT refund for a bad debt requires compliance with specific conditions. The business must prove the following:

1. Transaction Execution: The transaction must be between a business and a customer, which obligates the business to pay VAT on the transaction.
   
   
2. Issuance of VAT Invoice: The business must issue a VAT invoice for the transaction. This invoice serves as evidence that the transaction took place and VAT was paid.
   
   
3. VAT Payment: The VAT paid to the tax authorities for the transaction forms the basis for the refund.
   
   
4. Non-collection of Consideration: It must be demonstrated that the business was unable to collect the consideration or that part of it was not paid.
   
   
5. Debt Becoming Bad: The business must prove that the debt is uncollectible, meaning the debt arose in cases such as the customer’s bankruptcy, failure to collect through enforcement proceedings, or debt forgiveness in a creditors’ arrangement.
   
   

Submission of a VAT Refund Application
The application for a VAT refund due to a bad debt is submitted to the VAT department. The business must provide the following documents:

1. Credit Invoice: An invoice that reduces the amount agreed upon to collect from the customer.
   
   
2. Supporting Documents: Documents proving that the debt is indeed bad, such as court rulings regarding the debtor, enforcement reports, or documents related to debt settlements.
   
   

The application for the VAT refund must be submitted within a time frame of six months to three years from the issuance of the VAT invoice, in accordance with Regulation 24A. The regulation sets a strict time limit but allows for exceptions. In cases of special circumstances, an extension may be granted for submitting the application.

Time Limits and Legal Flexibility
As noted, Regulation 24A(c) imposes a three-year time limit for submitting a refund application. However, case law indicates flexibility and the ability to extend the time limit in exceptional circumstances, such as delays in collection proceedings or lack of awareness of the bad debt.

In the case Tzintziper (C.A. 3498/21), the court ruled that the time limit for submitting a VAT refund application could be extended in cases where the business was unaware of the bad debt in real-time or where enforcement proceedings did not yield positive results. The ruling emphasized principles of proportionality and flexibility, enabling businesses to deal with situations where the debt became bad after the expiration of the period.

Insurance Reimbursement for Bad Debts
In a recent ruling dated February 3, 2022, the Tel Aviv District Court accepted the appeal of Tnuva Ltd. (C.A. 39314-06-19), which argued that the insurance compensation received from an insurance company for a bad debt does not negate its right to a VAT refund. In this case, Tnuva had purchased a credit insurance policy, which included coverage for bad debts related to customers who failed to pay.

Tnuva marketed products to Mega Retail Ltd., which entered bankruptcy proceedings in 2016, leaving a debt of 100 million NIS. The insurance company paid Tnuva approximately 85 million NIS. The court ruled that insurance compensation does not constitute “payment for the transaction” and, therefore, does not invalidate Tnuva’s right to a VAT refund for the bad debt. Even if insurance compensation was received, the bad debt is still considered uncollectible, and Tnuva’s right to a VAT refund is preserved.

Practical Implications and Tax Policy
The practical implications of this interpretation are critical for business owners, as they can be assured that receiving insurance compensation will not deny them the right to claim a VAT refund for bad debts. Furthermore, in cases where the debt has become bad, a VAT refund may be due even if the customer did not pay the consideration, but insurance reimbursement was received.

The VAT Interpretation Circular 2/2012 issued by the VAT Department provides that if the business succeeds in collecting the consideration (wholly or partly) from any source, including an insurance company, it is considered as liable for VAT at the time of receipt. However, insurance compensation is not considered a taxable transaction, and thus the insurance company is not regarded as a third party settling the debt.

Conclusion
The VAT refund for bad debts is an important mechanism for businesses, but it must be carried out in an orderly and accurate manner, in compliance with the conditions set by law and regulations. The VAT refund will not be affected even if insurance compensation is received, and the business may still submit a refund application if it has received insurance reimbursement for the bad debt.

It is recommended that businesses seek professional legal advice to ensure the timely submission of applications and avoid legal difficulties.

Yaniv Ish-Shalom & Co. Law Office specializes in civil and criminal tax law and provides professional advice and representation to businesses in matters related to VAT refunds for bad debts.

For more information and to schedule a personal consultation, please contact our office.

What is the Conversion of Criminal Proceedings by Paying Money Ransom?
The conversion of criminal proceedings by paying money ransom allows a taxpayer suspected of a tax offense to pay a financial sum to the Tax Authority in exchange for the cessation of criminal proceedings. This option allows taxpayers to avoid criminal conviction and its associated consequences. However, it is important to emphasize that paying the ransom does not exempt the taxpayer from paying the full tax liability or rectifying the tax violations that led to the case.

Legal Framework for Conversion of Criminal Proceedings
The authority to convert criminal proceedings by paying money ransom is established in several Israeli tax statutes, which outline the legal basis and criteria for such arrangements:

1. Income Tax Ordinance [New Version], 1961: Section 221 empowers the Tax Authority to convert criminal proceedings for offenses such as failure to report income, submitting false declarations, and aiding in tax evasion.
   
   
2. Value Added Tax Law, 1975: Section 121 allows for the conversion of proceedings for offenses related to non-payment of VAT, fraudulent reporting, and similar violations.
   
   
3. Real Estate Taxation Law (Appreciation, Sale, and Purchase), 1963: Section 101 provides for the conversion of criminal proceedings for offenses related to capital gains tax and purchase tax.
   
   
4. Customs Ordinance [New Version]: Section 231 establishes the authority to convert proceedings in cases of smuggling, submission of fraudulent customs documents, and other customs-related offenses.
   
   
5. Purchase Tax Law (Goods and Services), 1952: Section 25 permits the conversion of proceedings for violations involving evasion of purchase tax.
   
   
6. Fuel Tax Law, 1958: Section 29 governs the conversion of proceedings in cases of fuel excise tax evasion.
   
   

Procedure for Requesting the Conversion of Criminal Proceedings to Money Ransom

The procedure for requesting a money ransom payment involves several key stages:

1. Submission of the Request: The taxpayer or their legal representative submits a formal application to the investigative division of the Tax Authority. The request must include justifications for leniency, relevant documents, and evidence of rectifying the violations, such as payment of outstanding taxes.
   
   
2. Examination by the Investigative Division: The division reviews the application and forwards its recommendation to the Ransom Committee.
   
   
3. Deliberation by the Ransom Committee: The committee evaluates the request according to statutory and administrative criteria, including the taxpayer’s criminal history, cooperation with authorities, and the broader public interest.
   
   
4. Determination of the Ransom Amount: If the request is approved, the committee determines the ransom amount based on the severity and scope of the offense and other relevant factors.
   
   
5. Payment and Case Closure: Once the taxpayer pays the ransom amount and fulfills any other conditions, the criminal case is officially closed.
   
   

Key Considerations for the Ransom Committee

The Ransom Committee considers various factors when deciding whether to approve a request for conversion:

• Severity of the Offense: Offenses involving significant tax evasion or repeated violations are less likely to qualify for conversion.
  
  
• Duration of the Violation: Prolonged offenses are viewed more severely.
  
  
• Criminal History: A clean record improves the likelihood of approval.
  
  
• Rectification of Violations: Demonstrating full payment of tax liabilities and correcting errors is a critical prerequisite.
  
  
• Personal and Family Circumstances: Health issues, psychological stress, or dependency of family members on the taxpayer may influence the committee’s decision.
  
  
• Public Interest: The committee balances the need for deterrence with the efficiency of resolving cases and conserving public resources.

Ransom Amount Determination

The ransom amount is determined based on the nature and scope of the offense:

• For Income Tax Offenses: The ransom amount is calculated as a percentage of the undeclared revenue.
  
  
• For VAT Offenses: The ransom amount is based on the unpaid VAT.

Typically, the amount ranges between 15% and 30% of the unpaid taxes but may be higher for severe violations.

Advantages and Disadvantages of Paying Ransom Money

Advantages:

1. Avoiding Criminal Conviction: Taxpayers benefit from avoiding a criminal record, which can have lasting repercussions on employment and reputation.
   
   
2. Efficient Resolution: The process is quicker and less resource-intensive than full criminal proceedings.
   
   
3. Certainty: Paying the ransom provides clarity and closure, avoiding the uncertainty of lengthy legal proceedings.
   
   

Disadvantages:

1. Financial Burden: The ransom payment is an additional expense beyond the tax liability.
   
   
2. Public Disclosure: Decisions of the Ransom Committee, including taxpayer names and ransom amounts, are publicly disclosed.
   
   
3. Record of the Offense: While the criminal case is resolved, the violation remains documented within the Tax Authority’s records.

 
Publication of Ransom Committee Decisions
The Tax Authority publishes the committee’s decisions twice a year. The publication includes details such as the taxpayer’s name, the ransom amount, and the nature of the offense. This transparency aims to deter future violations and uphold public trust.

Conclusion
The conversion of criminal proceedings by paying ransom money is an effective tool for resolving tax offenses in a manner that balances the interests of the taxpayer and the state. However, the process involves navigating complex legal and administrative frameworks, necessitating professional legal guidance.

Yaniv Ish-Shalom & Co., Law Office, specializes in representing taxpayers in ransom money proceedings before the Tax Authority. Our expertise ensures that clients receive tailored advice and achieve the best possible outcomes. Contact us for professional legal support and representation.

What is the Allocation of a VAT Invoice Number?
Under the new law, starting January 1, 2024, any business seeking to issue a VAT invoice for a transaction exceeding NIS 25,000 (excluding VAT) will be required to obtain prior approval and an allocation number from the VAT Commissioner. This requirement will gradually apply to transactions of lower amounts, with the full obligation extending to all invoices over NIS 5,000 by 2028.

The purpose of this new mechanism is to ensure that VAT invoice details are immediately and systematically transmitted to the tax authorities, as part of the effort to combat the phenomenon of fictitious invoices—i.e., invoices issued by businesses that either do not exist or do not reflect genuine transactions. The aim is to prevent tax fraud and strengthen both the fiscal and public systems.

The Process for Obtaining an Allocation Number

1. Submitting the Request: Businesses will be required to submit a request for an allocation number for VAT invoices through a dedicated digital platform of the Tax Authority. This request must include basic details such as the business identification number, customer information, transaction amount, and VAT. This process is expected to be carried out in most cases through the business’s existing accounting software, streamlining the procedure and reducing human error.
   
   
2. Review and Approval: Upon receiving the request, the Tax Authority will review the provided information and verify its accuracy using additional data from the business’s records. In cases where further information is needed, the Tax Authority may contact the business for clarification. A decision will be sent automatically within a short period, and in exceptional cases, within a few days.
   
   
3. Request Denial: If the request is denied, the business will have the option to appeal the decision through a hearing mechanism. This allows the business to present its position and provide any necessary information to clarify the situation. The final decision will be made after the hearing and sent to the business within one business day.
   
   
4. Objection and Appeal Mechanism: If a business disagrees with the Tax Authority’s decision, it may file an objection within 30 days of receiving the denial notice. If the objection is rejected, the business has the right to appeal to the District Court. Legal advice is essential in cases of appeal, as this is a legal process that can have significant consequences for the business.

Implications for Businesses
The new law introduces both operational and legal challenges for businesses, particularly for those handling high volumes of transactions. Delays in obtaining allocation numbers could disrupt business operations, damage reputations, and cause delays in payments to suppliers, potentially leading to significant economic consequences.

Criticism of the Law
While the purpose of the law is commendable and crucial for enhancing transparency and strengthening the enforcement capabilities of the Tax Authority, many businesses have raised concerns about the rigid implementation of the mechanism:

1. Lack of Flexibility: In many cases, the automatic approval process is carried out without human intervention, which limits the possibility of considering unique factors on a case-by-case basis. In instances of errors or technical issues, this lack of flexibility could result in the denial of requests.
   
   
2. Tight Deadlines: The short deadlines for the hearing process may pose challenges for businesses needing more time to prepare and organize their responses with the authorities. The hearing process may be perceived as complicated for businesses that did not anticipate it.
   
   
3. Impact on Ongoing Operations: Businesses that fail to receive allocation numbers in a timely manner may face cash flow difficulties, which could paralyze their operations. The inability to issue VAT invoices with allocation numbers may result in delays in payments, issues with suppliers, and even damage to the business’s reputation.

Similarities Between the Failure to Allocate VAT Invoices and the Failure to Approve Withholding Tax Rates
The new mechanism for VAT invoice allocation resembles the sanctions imposed by the Tax Authority for failing to approve a reduced withholding tax rate. For example, in the case of Li-Oz Shmash and Security Guarding Ltd. (Case No. 26743-04-21), the court ruled that the Tax Authority’s power to limit the withholding tax rate should be based on current failures, rather than historical ones. This approach should be adopted in the context of VAT invoice allocation, ensuring that decisions made by the VAT Commissioner are based on up-to-date information, not past investigations or errors.

How to Prepare for the Change

1. Upgrade Accounting Systems: Businesses must ensure that their accounting systems are updated to meet the new requirements and connected directly to the Tax Authority’s system. This will ensure that requests for VAT invoice allocation numbers are processed automatically and efficiently.
   
   
2. Maintaining an Accurate Business File: It is essential for businesses to maintain accurate and up-to-date reporting to the tax authorities to avoid issues with VAT invoice allocation requests. Past errors could lead to rejected requests, so businesses should keep a well-maintained and compliant business file.
   
   
3. Seek Legal Advice: Consulting with an attorney specializing in tax law is crucial to navigating cases where requests are rejected or when preparing objections and appeals. An attorney can guide the business on its rights and provide assistance in situations where the Tax Authority’s decision is not satisfactory.

Summary
The new VAT invoice allocation model aims to combat the issue of fictitious invoices by strengthening reporting and monitoring mechanisms. However, it requires businesses to adapt to significant changes in their operations. To successfully navigate these changes, businesses must ensure their accounting systems are updated, their reports are accurate, and their systems are aligned with the new legal requirements. It is essential that both lawmakers and regulators take into account the practical needs of businesses to ensure that the implementation of the law does not negatively affect those operating within the law.

Yaniv Ish-Shalom & Co. Law Office specializes in tax law, offering professional guidance and legal support to businesses dealing with the Tax Authority, With extensive experience and high professional capabilities in the field of taxation, our firm provides personalized legal assistance to businesses across various industries, focusing on effective, organized, and professional solutions for addressing challenges with the Tax Authority. Contact us for professional legal advice and representation.

Every dealer is required to administer account books and receipts from the very first day that his business is in operation. The administration of account books is dependent upon the type of business; the rules for bookkeeping are to be found in the Income Tax Provisions (Administration of Account Books).

Many dealers and assessees are in a situation in which a best judgment assessment is offered to them, by the V.A.T. office’s auditors, or the tax inspectors of the Assessment Clerk’s offices. This is based on the conclusion that the business results of an assessee / dealer are unreasonable for his field of endeavor, or that he did not administer account books according to the legal requirements.

The normative framework

The authority to conduct a tax assessment according to best judgment is granted to the V.A.T. Director, under Article 77 of the V.A.T. Law, 5736 – 1975, an, also, to the Assessment Clerk under Article 145 of the Income Tax Ordinance (New Version), 5721 – 1961.

In these laws, a mechanism has been established, by which the dealer / assessee is entitled to disagree with the assessment, and to object thereto within 30 days of the day on which the notice of assessment was issued, or within a date later than that which the Assessment Clerk Director permitted.

Furthermore, if the V.A.T. Director or the Assessment Clerk rejects the objection, in part or in its entirety, the dealer / assessee is entitled to appeal the Director’s decision to the District Court.

In order to refute a best judgment assessment, the objection must be supported by concrete evidence.

A dealer / assessee who has been found not to have administered account books, as legally required, in his business, may be exposed, during an audit of his accounts conducted by the Tax Authority, to having an assessment determined by best judgment. Moreover, it is possible that the V.A.T. Director or the Assessment Clerk have concluded that the dealer’s / assessee’s income, in relation to his expenses, is exceptionally low relatively to the data of dealers / assessees operating in the same field. This is done over time and without a reasonable explanation. In such cases, an assessment may be determined according to best judgment; the tax assessment might reach the highest tax charge amounts, regardless of the business’s actual income and expenditure, because this assessment is unable to reflect accurately the business’s income  and expenditure, as the assessment is not based on evidence, but, notwithstanding, it is based on speculation and assumptions and must be faithful to the business and the circumstances, and it will be examined by the professionalism of the V.A.T. Director and the Assessment Clerk.

Best judgment assessment should be based on concrete evidence and data, and will not be arbitrary, excessive and unfounded; A best judgment assessment is an informed hypothesis, based on expertise.

A best judgment assessment does not punish the dealer / assessee; the court gave its opinion on that, by saying:

“A best judgment assessment is not intended to punish the assessee who failed, but rather to promote the determination of a true tax”.
(Civil Appeal 5324/05 Bashir Nabhan Shehadeh v, Acre Assessment Clerk).

The Court’s intervention is a best judgment assessment.

A best judgment assessment should be considered to be a verdict, for all extents and purposes; the appeal against the rejection of the objection will be submitted to the District Court, and will be heard before a single judge, who will be entitled to appoint consultants, as applicable.

As a rule, the Court will not rush into taking the place of the V.A.T. Directors and the Assessment Clerks and exercising their discretion. Even when the assessment is given by guessing and by conjecture, the Court does not intervene in order to determine the assessment itself, but rather, deals with the procedure, an error in the law, a disregard for actual facts, a claim by the owner of a business that the assessment given to him is in an unfounded and arbitrary trend, and will have to be backed up with objective evidence, as well as the degree of proof required in civil law that the assumptions on which the Tax Assessor based the tax assessment are not reasonable.

Recently, the Court referred to the matter of making a best judgment assessment and determined that just as the V.A.T. Director’s expectations that a dealer’s business results will be reasonable, when the Director comes to the conclusion that the results presented to him are unreasonable, and therefore decides to make assessments according to best judgment, then his best judgment assessments should be reasonable and rely on tested and stable foundations. In the matter of Opal Leshem Holdings Ltd. (Tax Appeal 22007-06-13 Opal Leshem Holdings Ltd. v. V.A.T. Director – Haifa) given on August 24^th, 2015 (not previously published) the Court ruled that:

“A best judgment assessment issued by the Director, in justifiable circumstances, cannot be a casual assessment “off the top of his head”, but must be based on reasonable data… A best judgment assessment does not have to be precise, since it is not based on precise evidence, but it must be as reliable as possible under the circumstances of the case”.

And later in the judgment it was determined that…

The Director must exercise the knowledge and expertise given to him, in order to determine the assessment”.

Professional legal counseling in the early stages of a process might inevitably turn into a game-changer. Objection to a best judgment assessment should be reasoned with concrete reasoning, with relevant references to the points made in the assessment, with detailed reference to all its clauses, therefore it is important to submit the objection within the period determined by law. There are situations in which an application may be submitted for an extension for submitting the objection, but that requires a sufficiently good reason.

The offsetting or distribution of fictitious tax invoices are criminal tax offences. According to the estimation of the Israel Tax Authority, the size of the damage directly caused to the country’s treasury amounts to tens of billions of Shekels each year. Senior officials in the Israel Tax Authority have declared this phenomenon a “National calamity” because this phenomenon severely damages the country’s tax revenue.

The Israel Tax Authority and other law-enforcement authorities (Unit 433 of the Israel Police, the National Insurance Institute) battle against the phenomenon of fictitious tax invoices and enforce the law very strictly against those who commit such offences, both against dealers that have deducted input tax based on fictitious tax invoices and also against those who distribute such invoices. The Israel Tax Authority conducts widespread investigations against this phenomenon, using a variety of tools that are at its disposal.

Such tax offences receive a lot of attention because of the harm to the country’s revenue, the need to minimize the phenomenon and the punishment imposed on those carrying out the offences; this is expressed, in the courts, by lengthy periods of imprisonment.

The normal framework 
 The Value Added Tax Law

117(b) – if a person performs one of the deeds listed below with the objective of avoiding or escaping payment of tax, his sentence is 5 (five) years’ imprisonment or double the fine determined in section 61a(4) of the Criminal Code, 5737 – 1977 (in this section – “the Criminal Code”):

(3) Issued a tax invoice or a document that purported to be a tax invoice, without performing or undertaking to perform the transaction for which he issued the invoice of the aforementioned document.

(8) Used deceit or trickery, or allowed another to use them, or did something else.

Income tax

If a person, intentionally, with the objective of evading tax, or helping another person to avoid tax, committed one of the offenses listed below, his sentence will be 7 (seven) years imprisonment or a fine as stated in section 61a(4) of the Criminal Code and twice the sum of the income that he concealed or helped to conceal, or both those punishments combined; and they are:

(2) Submitted a report under the above-mentioned ordinance or gave false details.

(4) Prepared, upheld or allowed a person to prepare or to uphold false account books or other written records, or forged or allowed another to forge account books or records.

(5) Used any deceit, sleight or trickery, or allowed another to use them.

What is a fictitious invoice?

A tax invoice is a document that constitutes documentation for recording in a dealer’s accounts system; through a tax invoice the sum of the invoice may be offset, both for purposes of V.A.T. (input tax) and also for the purposes of income tax (recognized expenditure), in the framework of an assessee’s taxable income, and/or as part of determining the sum of V.A.T. that must be transferred to the Director of V.A.T. for transactions performed in the period being reported.

In the case of a fictitious invoice, the owners of the businesses that file the reports, reduce their tax liability artificially, so that they will be able to pay less V.A.T., income tax and National Insurance, by performing tax offenses. In some of the cases these are real, legitimate businesses, while others are fictitious businesses.

The field of taxation is fertile ground for criminal activity, in white collar crime that embroils tax offenses in which criminal elements and crime families are involved.

Types of fictitious tax invoices.

1. Fictitious tax invoice: a tax invoice issued without any product or service being provided in return. An invoice issued not in return for a transaction between the parties. Its objective, as stated previously, is to pad a business’s expenses, both for the purpose of deducting the input tax specified in the invoice, and, also, for the purpose of padding the business’s expenses in order to pay reduced income tax, based on fictitious expenses.
2. A tax invoice that does not actually reflect the transaction: a tax invoice issued, where the sums stated are higher than the actual sum of the transaction. There are cases in which dealers include, as part of their business’s expenses, invoices of this nature with the intention of reducing their tax liability (V.A.T., income tax and National Insurance).
3. A foreign tax invoice: a tax invoice issued by a party that did not sell the product or perform the service. In such a case, there are a number of parties involved: the party that sold the product or performed the service, the party who received the invoice and the party who actually issued the invoice. A tax invoice must be issued to the payer by the party that sold him the product or who performed the service.

Ignorance of the law does not exempt the business, and/or the company and its owners from civil and criminal liability. The burden of evidence and of proof is imposed on them. It is a very heavy burden which causes the dealer considerable inconvenience in arguing against his legal obligation to check whether an invoice is fictitious.

The sanctions relating to offenses of fictitious tax invoices allow the Tax Authority to act on a number of levels:

Disqualification of account books – as part of issuing a tax assessment (V.A.T., income tax) the business’s books will be disqualified and it is more than likely that a best judgement assessment will be issued which will bring about the very highest tax payments.

Fines and interest – the assessments issued for a dealer by best judgement assessment will include interest payments, linkage differentials and fines of very considerable sums that will be derived from the volume of the transactions reported.

Charging double tax – Article 50 of the V.A.T. Law allows the Israel Tax Authority to impose double tax (V.A.T.) for the input V.A.T. that was demanded in those fictitious invoices.

Long terms of imprisonment – the courts impose very severe punishments on those who commit tax offenses with fictitious tax invoices.

Imposition of individual liability on the executives of a business or a company – This is a very heavy liability; company executives can find themselves involved in tax offenses and money laundering, whether consciously or unconsciously. In a case of this kind, they will be investigated under caution, and, usually, the accountant of the business or company will be investigated under caution, and serious indictments will be served against them.

Israel’s taxation laws are very complex and require a deep understanding and acquaintance both of the various parties involved in administering the investigations and the Israel Tax Authority’s claims system. Therefore, there the most appropriate legal representation by means of an experienced lawyer, who is an expert in the field of taxation, is dramatically important. Our firm will assist, counsel and represent owners of businesses and companies in tax offense cases in the following areas:

1. Assistance, counsel and legal representation of suspects during investigation by the Israel Tax Authority and the Israel Police.
2. Legal counsel during the various legal proceedings that will be opened against a suspect, or a person accused of tax offenses, against the investigating and enforcement entities and in the courts for various proceedings.
3. Administering negotiations and representation in hearings prior to the serving of an indictment, with professional efforts to reduce the indictment, to reduce the punishment with the aim of cancelling the indictment or achieving an acquittal in court.
4. Legal representation of dealers and assessees in appeal processes for legal proceedings, and/or as part of appeals to the Israel Tax Authority.

Professional legal counseling in the early stages of a process might turn into a game-changer, holding intensive discussions the Director of Value Added Tax or the Tax Assessor, with real arguments and reasoning, backed up with relevant documentation might definitely cancel the outcome.

A tax investigation may be opened against a private individual, an independent dealer, a company and/or corporation, based on the suspicion of committing tax offenses; the most common offenses are concealing income (working under the table), inflating expenses by the use of fictitious tax invoices, filing false reports, smuggling goods, etc. Furthermore, a tax investigation can also be opened because of a suspicion of committing a technical offense, the most common of which is the failure to submit reports, administering account books not in accordance with the provisions, or the failure to transfer deducted payments, etc.

How is a tax investigation opened?

As a rule, an investigation will begin covertly; the Tax Authority operates an intelligence team that incudes intelligence officers whose job it is to gather information on various subjects; an investigation can be opened by obtaining information from an intelligence source operated by the intelligence officer, or on the basis of suspicion that arises in the Tax Authority’s sophisticated data analysis systems. On receipt of the information, an undercover investigation is opened, which deals mainly with establishing suspicions and gathering evidence prior to the open investigation, at which point the suspect / interrogee is unaware that an undercover investigation is underway against him. The material and the evidence are gathered by the intelligence system, covertly, with the aid of a range of methods and means, most of which are classified.

After gathering the evidence and formulating the suspicions, the investigation comes out into the open. In this case, the Tax Authority investigators surprise the suspect / interrogee, at his home, in the early hours of the morning, for the purpose of conducting a search of the home, during which, evidence of any kind will be seized (documents, computers, telephones, digital files, etc.). It is highly likely that on the same day, the suspect’s business, or his bookkeeper, and/or accountant will be searched, in order to seize evidence or even to investigate or question them. At the end of the search, the suspect will be detained and taken to the Tax Authority’s investigation facility, where he will be investigated for hours, and the evidence gathered will be presented to him and he will be required to respond.

From my wealth of experience, I can say that the moment when the suspect / interrogee is woken in the early hours of the morning and discovers that an undercover, and now open, investigation is being conducted against him is a very difficult moment for him and for his family, taking them by surprise in a most unpleasant manner.

As a rule, at the end of the investigation, at the investigation facility, the suspect will be brought before a judge for the extension of his custody for the purpose of investigating him, on the grounds that there are many investigative actions that the Tax Authority investigators must perform, actions which can only be performed when the suspect is in custody and unable to disrupt the investigation by coordinating versions or concealing investigation material that the investigators have not yet reached, and also for the purpose of performing interrogation tricks such as placing a “stimulant” in the suspect’s cell.

It is very important to be represented from the very first moment when a person / dealer / corporation understands that a tax investigation is being conducted against him / them. The Tax Authority investigators are highly professional and thorough, after undergoing extensive training, and any attempt to deal with them alone might cause irreparable damage to the suspect / interrogee, and thus harming his chances of completing the process with a significant reduction of the damages.

A tax investigation is a very serious business!!! The suspect is confused after being surprised in the early hours of the morning and being under a lot of stress. The best way to act, as soon as he realizes that he is under investigation is not to say a singe word until the arrival of the lawyer representing him.

Our firm has a wealth of experience in the field of tax investigations, at all stages of the investigation and the resultant legal proceedings.