Israel's Missing Billions - a new study of aggressive tax planning and corporate social responsibility
Ramat-Gan, Israel, 7th June 2011
The Legal Clinic for Corporate Social Responsibility at the Academic Center of Law & Business (CLB) in Ramat-Gan, Israel, recently launched a new and innovative report, "The Missing Billions" analysing the ‘tax gap’ (i.e. the gap between the statutory corporate tax and the actual tax payment) of 25 leading Israeli corporations listed on the Tel Aviv Stock Exchange (TASE) TA-25 index.
By examining the integrated financial reports of these corporations for the years 2006-2009, the authors of the report, Advocate Ofer Sitbon, and Advocate Moran Harari and Dr. Ronit Donyets-Kedar, found that the potential tax loss to the Israeli government from these corporations was approximately NIS 3 Billion (about US$857 Million) per year. At least seven of these corporations reported having one or more affiliated companies registered in locations considered as ‘Tax Havens’, such as the Virgin Islands, the Bermudas, the Cayman Islands, etc.
The report also reviewed donations made by these corporations during these years to the communities in support of social responsibility projects. Based on the combined annual donations of 15 of the 25 corporations, and assuming that the reported numbers were representative of the whole, the authors estimated the combined annual donations of the 25 firms at NIS 274 million (approximately US$78 Million) per year. Allegedly, the numbers are considerable. However, the ratio between the corporate community giving of these corporations and the Tax Gap is 1 to 11.
For example, from 2006-2009, ‘Israel Corporation Ltd.’, which is controlled by the Ofer brothers, donated nearly NIS 100 million to the community. On the other hand, the company paid NIS 1.74 billion less in taxes than its declared corporate tax rate would suggest it should have. De facto, the company paid NIS 1.3 billion on its reported profits for these years, reflecting an effective tax rate of just 12%. Before the report was published, Israel Corporation Ltd. confirmed to the authors the above numbers, though it noted that its tax flow payments were materially different from its total tax payments. Nevertheless, in response to questions from journalists following the publication of the report, the company stated that it paid its taxes in accordance with the law, and that the authors’ conclusions were wrong and misleading.
Another company, ‘Discount Investment Corporation’, controlled by the IDB Group, donated nearly NIS 41 million to the community from 2006-2009. However, the tax it paid on its profits was NIS 800 million lower than the figure reflecting its statuary tax rate, putting the ratio between the two at 1 to 16. In response to questions from journalists, the company maintained that it had paid its taxes in accordance with the law, and that in any case the amount of its tax payments is unrelated to its corporate community giving.
The report argues that adopting a responsible tax payment policy is an essential part of a corporation’s social responsibility. The essence of this argument is that a corporation cannot manage its activities without the help of the country in which it operates, and whose services (e.g. labourers, security, infrastructure) and resources (e.g. water, gas, land) it consumes regularly. So as part of the ‘social contract’ between the country and its citizens, the corporation is expected to return its debt to the society and pay its taxes in full.
Given that CSR refers to the area of contribution to society that goes beyond mere compliance with the law, the report claims that the corporation is expected not to exceed its ‘license to operate’ and to avoid using any form of aggressive tax planning (i.e., the use of complex schemes of uncertain legality to exploit tax loopholes in order to reduce tax payments. Part of these schemes are based on the use of Tax Havens’), even when such planning is considered legal.
It is important to emphasise that aggressive tax planning is not the only reason for the Tax Gap. Among other potential reasons for the gap are the various tax incentives the government provides and the share of the ‘deferred tax’ in the corporations’ financial accounts.
As the resources for this report were quite limited, the authors were unable to isolate the other reasons in order to find the exact relative effect of aggressive tax planning on the Tax Gap. However, the main aim of the report was to point out the existence of the Tax Gap, and its detrimental impact on the country’s economy, on wealth distribution and the strengthening of corporations against the diminution of the government.
In addition, by presenting the ratio between the Tax Gap and the corporate community giving, the report demonstrates that the potential damage caused to Israeli society by the Tax Gap is immensely higher than the welfare the society enjoys as a result of the corporations’ community giving.
The report argues that Israeli corporations cannot claim to be ‘responsible’ only for their philanthropic activity. Rather, they should adopt a "second generation" approach of CSR and, consequently, pay their taxes in full. The report also calls for more transparency by corporations with regards to issues of tax policy, and suggests that public authorities should avoid signing contracts with corporations that use aggressive tax planning.
The report (in Hebrew) is available for download here.
See also the article in the English edition of Israel's leading economic newspaper The Marker here.
Contacts: Ofer Sitbon – Ofer[at]clb.ac.il; Moran Harari - moranh62[at]gmail.com; Ronit Donyets Kedar- ronitkedar[at]gmail.com