Israel Tax Authority Demands to Repay Covid-19 Grants
Recently, the Israel Tax Authority began requiring businesses that received grants under the Economic Aid Plan Law (New Coronavirus) (Emergency Order), 5780 – 2020 (hereinafter: the “Law”), to repay grant amounts that exceed the business’ fixed charges. This is because, according to the Tax Authority’s approach, the Director of the Israel Tax Authority has been granted the authority to reduce that grant’s amount, within Section 7 of the Law.
In our opinion, in light of the fact that the Legislator has refrained from defining the concept “fixed expenses” in the Law, and the Legislator set forth a uniform mathematical formula to calculate the grant amount for each business, while setting a ceiling for the grant amount, the grant amount should not be examined in relation to the amount of the business’ fixed expenses. This is because the Legislator preferred simplicity and uniformity over individual surgical examination of every business, and therefore some businesses will incur losses as a result of the manner of calculation while other businesses will gain from it.
In addition, in our opinion the language of the Law indicates that the authority granted to the Director of the Israel Tax Authority to deviate from the formula is an authority intended to benefit businesses only.
We believe the Tax Authority’s interpretation is not reasonable since, if their position was that the Legislator intended to aid only in “covering” the business’ fixed expenses, then why did the Legislator ignore the question whether, despite the drop in the business’ volume, were the business’ revenues greater or lesser than its total fixed expenses or whether the business had surpluses? That is to say, according to the Law and the Tax Authority’s approach, even a business whose volume was greater than its fixed expenses, yet which experienced a drop in volume, could be eligible for a grant, even if it has substantial accumulated surpluses. If that is so, wouldn’t we reach the same conclusion either way? Why, according to the Tax Authority’s position, would a situation where the business’ volume was less than its fixed expenses, yet together with the grant exceeded the fixed expenses, fail to fulfill the legislative intent?
Therefore, we believe it would be appropriate for the Tax Authority to adopt the result of the grant’s formula, even in cases where their position is that the grant amount exceeds fixed expenses, particularly in light of the fact that the grant constitutes income for tax purposes, such that should “profit” be accrued from the grant, it would be taxed at a rate of up to 50%.
Even if we were to accept the Tax Authority’s approach regarding the Director’s aforementioned authority, we also dispute the narrow manner in which the Tax Authority interprets the amount of the business’ fixed expenses, and a situation in which, in the absence of a definition of the term “fixed expenses” in the Law, and in the absence of the publication of an execution directive on the topic by the Director of the Israel Tax Authority, every Tax Authority employee could adopt an independent position.
In light of the above, we recommend consulting with a professional on this topic, and considering filing an objection against the Tax Authority’s decisions, and where needed, appealing to the Appeal Committees established for this purpose.
For additional information, contact Adv. (CPA) Shahar Strauss or Adv. Raz Yahalom from our firm.