Inheritance Taxation in OECD Countries and in Israel - Is it a good idea?

Yesterday (May 11, 2021), an OECD report was published about "Inheritance Taxation in OECD Countries". Following this, a conversation was held today ('zoom' of course) in the presence of about 400 participants from around the world, in which the three OECD economists in charge of preparing the report presented the research report and the main findings on inheritance tax and inheritance tax, as well as their recommendations. In Israel, the morning newspapers have already hurried to add headlines to economic newspapers claiming that "the OECD report recommends the imposition of inheritance tax in Israel". However, the facts are slightly different and a little more complex. First, for those who fear that the OECD is keeping an eye on us, it is worth emphasizing that a specific state of Israel is not mentioned at all in the report itself (Israel is mentioned in accompanying documents to the report, such as infographics, etc. as part of a large group of countries, in about a third of OECD countries, that repealed inheritance taxes between the 1970s and the last decade).

In fact, the OECD's recommendation should fall on open ears as countries seek additional sources of income after the severe hit of the COVID-19 period and increased government spending worldwide, so OECD economists have chosen to turn to this issue and open up the inheritance taxes, ostensibly as a solution to tax revenues. But as we wrote above, the facts are more complex. Anyone who reads the report will find that its main purpose is not to increase state tax revenues, since the study actually raises the same findings that we have known from similar studies in the past when even in countries where inheritance tax regime applies, the average tax revenue is only about 0.5% of the total tax revenue in those countries (In most countries even less so).

It is important to emphasize that this is only the income side, without weighing the cost of collecting the inheritance tax, which is perhaps a more complex and cumbersome system than any other tax system that these countries operate. The obvious conclusion is that net income is even significantly lower. In this context, it should be noted that the repealed of the inheritance tax in Israel in 1980 was also due to the fact that the tax collection system was so inefficient, expensive, and yielded minor incomes that cost-benefit considerations led to the abolition of this tax system in Israel. And if we mentioned above about ten countries that have canceled this tax over the years, then the State of Israel is no exception in this regard. I do not pretend to express a professional opinion regarding the macroeconomics of a variety and completely different countries. At the same time, I must express my point of view at least from an Israeli perspective and as a tax lawyer and a CPA who deals with tax law daily. Why is estate taxation such a complicated issue, is it not like any other tax? The short answer is 'No'. And I will give an example of one of many to explain it shortly: In practice, the estate tax is particularly problematic in light of its nature, in the simple case where a person inherits a business worth millions, assuming he has no additional property but the business value is subject to inheritance tax than one of two will happen, or the law will allow him to defer inheritance tax till the time he will sell it. (While risking that the tax will never be collected if he and his inherits will not sell it) or that the law will require him to pay tax which will actually lead to the dissolution of the business (in essence it is no different from nationalizing property). This situation and others similar to it lead to a conclusion in which it is obligatory to exempt certain assets and/or to establish different tax regimes to deal with them. It is for this very reason that a wide variety of exempt properties are created as well as a wide range of heirs and recipients of exempt gifts (usually spouses but not only) in any country that applies estate tax.

This situation allows accountants and tax lawyers to plan the transfer of assets so that it will be tax-exempt or subject to the minimum tax. The result of the above is that estate tax in countries like the US for example reaches a very high tax rate of 50% on the one hand, while on the other hand it applies to 0.2% of the total estates and puts into the treasury pocket a negligible amount of less than half percent of total tax collection (0.47%) which is only about 0.1% in terms of GDP.

In fact, the main motive that led to the research and the "recommendations" is an approach to reducing inequality in every country rather than increasing tax revenue. This approach has a lot to discuss and understand but it is not our topic now. Even if that's the goal, it is easy to understand that if this tax is ineffective and its collection is extremely negligible and expensive then its effect on inequality will also be minor if at all. Perhaps this is the place to quote the statement of Margaret Thatcher On her last day in parliament while questioned on the widening gap between richest 10% and poorest 10% during her Prime Ministership: "So long as the gap is smaller, they’d rather have the poor poorer".

Nike, Albert Einstein and the OECD researchers A look at the status of inheritance taxes today shows that they are not working. The mechanism does not work properly, in places were trying to do justice - there is no collection and the costs are too high to operate the mechanism. We would expect researchers looking at this data to look for other tax collection methods (and recall that the team that published the study in question is a team working in tax policy), but in practice what the researchers did is explain that the reason it does not work is that other rules need to be streamlined. Then the problem will be solved (as if the states that implement inheritance tax regimes do not know this and have not tried to amend and change the law over the years). There is a story about two Nike sales agents who came to Africa, after a tour of the continent one returned embarrassed and depressed and the other returned happy and joyful. When asked the first how the trip was he said 'it was a waste of time, no one has shoes there at all and the company has nothing to do there'. The other sales agent on the other hand shone happily, he said: 'you do not believe this place! everyone there barefoot! we are going to sell shoes endlessly!'. So as in the joke about the sales agents, while we see this is not working, they are sure we just turned it on wrong and recommend re-examining the inheritance taxes rules in all the countries that have it already and also in countries that do not. So are the OECD researchers are the sales agent from the joke above or is their conclusion more in line with Einstein's well-known saying?

In conclusion, I would point out that the combination of the circumstances of the strengthening of OECD bodies and the attempt to prevent the "escape" of inheritance taxes such as the OECD well known BEPS mechanism that took over the international tax world regarding business profits, may press and stir this issue in Israel as well. Although there is still no draft law or proposal on the subject, given the uncertainty of the composition of the next Israeli government, it is better for anyone with an interest, owning various assets, businesses, etc. to act in advance prematurely and get a piece of advice from professionals (since even transferring assets in life today to family members can lead to unexpected tax results without proper planning) and may we all have a good and healthy long life. For more details and any advice regarding plan an intergenerational property transfer, please contact az@zw-co.com