Bank of Israel Holds Off on Mandatory Tax Returns

Only if a system can be implemented that would make the process simple and easy should the government undertake such a change, the BOI said.

Currently, only companies and self-employed individuals must file returns in Israel, whereas regular working Israelis are exempt. The Tax Authority relies on the employers to automatically pay out taxes from each paycheck, a method used in about half of the OECD countries.

Proponents of broadening the income tax filing argue that it could increase flexibility in tax policy and potentially combat tax evasion.

“If it becomes clear that the tool is effective, and the government decides to institute general reporting, it should be implemented in an advanced method that takes full advantage of up-to-date technological possibilities — the pre-filled tax return method,” read an excerpt released Wednesday from the forthcoming annual report.

But the bank is skeptical that mandatory filing would be worth the effort and expense. It would entail creating a database and a user-friendly system for pre-filled returns, a solution used in 13 OECD countries. All regular taxpayers must do is look over the return and either correct or approve it.

Until the necessary technology is in place, “the imposition of a tax return filing obligation on employees through a non-automatic method will be a heavy burden on individuals, and will lead to increased expenditure by the Israel Tax Authority,” the bank said.

The bank noted also that there was no difference in the size of shadow economies among countries with and without filing obligations. It also found no evidence that automatic filing would encourage greater compliance with tax laws.

This article appeared in print on page 7 of the March 20th, 2014 edition of Hamodia.