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. 

In the field of import taxes (customs duties, purchase tax and excise tax) and international trade processes, the firm assists its clients, in the civil and criminal sectors, with tax rates, refunds, exemptions and returns; the firm grants its clients counseling and assistance in all matters concerned with the import of goods, including personal import.

The firm counsels oil companies and entities entitled to exemptions or refunds, in matters of excise duty, and, also, assistance in implementing the provisions of the Oil Law and the Diesel Arrangement. The firm deals in and provides continuous service in the following matters:

Assistance with customs in import and export processes.

Representation and legal counseling in instances of goods being apprehended and confiscated.

Representation and legal counseling in appeal processes of customs payments and submitting claims to the various courts.

Representation and legal counseling in determining tax rates, including determining the value of the goods for tax purposes.

Customs duties are an indirect tax imposed on the import of goods to the State of Israel, whether personal import or commercial import. There are different provisions for the personal import of goods that arrive together with a passenger on his return to Israel; those provisions differentiate between those entering Israel on land, and those entering by air or sea. In each of the instances, a different exemption is given, but in all cases, it is obligatory to declare deviations from the exemptions (green / red channel).

Offenses under the Customs Ordinance

Offenses under the customs ordinance that were committed without any intention to evade payment of the tax is a criminal offense, and the punishment might be imprisonment of up to six months or a fine. For committing an offense with the intention of evading the payment of tax, the punishment might be an extended prison sentence, while under the Prohibition of Money Laundering Law, the punishment might reach ten years’ imprisonment.

Further to the provisions on the import of goods, there are provisions that concern the export or import of money from and to Israel through the various border crossings. These provisions determine an obligation to report the export or import of sums of money greater than the sum for which no report is necessary. Currently, the following sums of cash and checks may be exported and imported, without any need to report: through an air or sea border crossing, up to NIS 50,000; at a land crossing (except for the Allenby bridge crossing) up to NIS 12,000, and through the Allenby bridge crossing, up to 2,000 Jordanian dinars(approximately NIS 10,000).

Failure to report the export or import of money from or to Israel is likely to result in civil, administrative or criminal punishment.

Professional legal counseling in the early stages of a process might inevitably turn into a game-changer, whether by terminating the process without a criminal indictment, by means of an administrative process and imposing a financial sanction, without a criminal record or imprisonment, or, alternatively, reducing the counts on which the indictment was served. 

Income tax is a direct tax imposed on the income of an individual or a corporation; the tax laws permit the deduction, from the income, of the expenses paid for the creation of that income, so that, in practice, the tax is imposed on the profit; other than deduction of the permitted expenses, there are situations when it is possible to offset losses from previous years, and there are also exemptions that may be realized. Income tax offenses are divided into two principal types, as far as the severity of the potential punishment is concerned; it is made clear that, in any event, these offenses should not be taken lightly in terms of the consequences for those who are convicted of them.

Offenses under the Income Tax Ordinance

Offenses under the Income Tax Ordinance are divided into two groups, technical offenses and substantive offenses; of course, the type of offense with which you have been charged is significant, and the type of offense also has a significant effect on the results of the legal process against you.

Technical offenses are cases where the business or assessee acted contrary to the technical provisions of the Income Tax Ordinance, but without any criminal or malicious intentions in his actions. Technical offenses relate to incorrect behavior and are not tax evasion. The following are examples of technical offenses: failure to file an annual report, and/or filing an annual income tax report late, lateness in submitting a declaration of capital, administering account books in a way that does not comply with the instructions, or failure to administer account books at all. Incorrect behavior in deducting tax at source, etc.

Offenses of this kind are considered criminal offenses, but they are less serious; The Income Tax Ordinance determines that whoever commits a technical offense may be sentenced to imprisonment of up to one year. The circumstances play a major role in determining the sentence and if the oversights have been removed, the tendency is not to impose a prison sentence, but rather an administrative fine, or possibly even a suspended sentence.

Substantive offenses are those in which the business or assessee acted out of criminal intentions to evade or escape paying the tax that it owes. Examples of substantiative offenses are deducting fictitious tax invoices, the concealment or destruction of information or account books, increasing expenses artificially, not reporting income, aiding and abetting another in tax evasion, etc.

Substantiative offenses are serious and the punishment for them might, under normal circumstances, reach imprisonment of up to five years, and in severe cases, up to seven years. Usually, a heavy fine will also be imposed on an offender of this sort.

It must be pointed out that in certain cases there is a possibility of paying a forfeit as an alternative to a criminal indictment, by submitting a well-reasoned application for a forfeit to the Israel Tax Authority; in the event that the application is accepted, a heavy fine will be imposed for those offenses as an alternative to criminal punishment and the deletion of the criminal record.

In the field of income tax, the firm helps businesses and assessees, individuals and companies in how to manage with tax assessors, throughout the country, on the following topics:

• Classification of income (earned income / capital gains income).
• Legal counseling in the assessment and audit processes, objections and appeals to the courts.
• Legal counseling on matters of deductions.
• Legal counseling on the rescheduling of debts and payments.

Professional legal counseling in the early stages of a process might inevitably turn into a game-changer, whether the business or the assessee has been invited to have his accounts audited, or if he is under investigation, or if an indictment has already been served against him. The classification of the alleged offenses is of great importance, with emphasis on intention, without which, as stated above, the possible offenses and punishments might be less severe.

V.A.T. is a form of indirect taxation that is added to almost every transaction; it is a tax that is imposed on the added value, and is one of the State of Israel’s main tax laws, because it is such a central tax that allows businesses to make their own assessments and to offset the tax that they paid against the tax that they owe and to transfer the balance, or to receive a refund from the Tax Authority.  This situation allows V.A.T. offenses to be committed, and indeed V.A.T. offenses are comparatively common. There are two main types of V.A.T. offense, in terms of the severity of the potential sanctions. It should be made clear that, in any event, these offenses should not be taken lightly in terms of the consequences for those who are convicted of them.

Offenses against the Value Added Tax Law

Offenses under the V.A.T. Law are divided into two groups, technical offenses and substantive offenses; of course, the type of offense with which you have been charged is significant, and the type of offense also has a significant effect on the results of the legal process against you.

Technical offenses are cases where the business or assessee acted contrary to the instructions of the V.A.T. law, but without any criminal or malicious intentions in his actions. Technical offenses relate to incorrect behavior and are not tax evasion. The following are examples of technical offenses: failure to file a report, and/or filing a V.A.T. report late, administering account books in a way that does not comply with the instructions, or failure to administer account books at all.

Offenses of this kind are considered criminal offenses, but they are less serious; the V.A.T. law determines that whoever commits a technical offense may be sentenced to imprisonment of up to one year. The circumstances play a major role in determining the sentence and if the oversights have been removed, the tendency is not to impose a prison sentence, but rather a fine, or possibly even a suspended sentence.

Substantive offenses are those in which the business or assessee acted out of criminal intentions to evade or escape paying the Value Added Tax that it owes. Examples of substantive offenses are the offset, and/or distribution of fictitious tax invoices, concealing or destroying information or account books, deducting of input without accounting documentation, demanding private input to reduce the payment of V.A.T.

Substantive offenses are serious and the punishment for them might, under normal circumstances, reach imprisonment of up to five years, and in severe cases, up to seven years. Usually, a heavy fine will also be imposed on an offender of this sort.

In the field of V.A.T. our firm helps businesses and assessees, financial institutions, real estate entrepreneurs, foreign and Israeli companies, both in the initial stages of putting together the transaction and in V.A.T. issues that concern the nature of payment demands, including taxation aspects of non-profits and financial institutions.

• Classification of transactions as taxable or non-taxable; reporting transactions from which input has been deducted for V.A.T.
• Legal counseling in assessment and audit processes, objections and appeals to the courts.
• Legal counseling in matters of V.A.T. liability in real estate transactions.
• Legal counseling in matters of V.A.T. liability, imposed on the import of services and intangible assets.
• Legal counseling to financial institutions and non-profits.

Professional legal counseling in the early stages of a process that might turn into a game-changer, whether the business or the assessee has been invited to have his accounts audited, or if he is under investigation, or if an indictment has already been served against him. The classification of the alleged offenses is of great importance, with emphasis on intention, without which, as stated above, the possible offenses and punishments might be less severe.