Israel Tax Authority Warns of Funding Shortfall for Compensation Fund
The head of Israel's Tax Authority, Shi Aharonovitch, has warned that the compensation fund, established to aid those affected by the ongoing conflict, is rapidly depleting and will likely require state budget allocations starting next year. Since the war began, approximately 20 billion shekels have been withdrawn from the fund, and the entirety of purchase taxes were diverted to it in 2024 and 2025. While the fund has historically been self-sustaining, Aharonovitch stated that with only a few billion shekels remaining and a backlog of claims, state funding will become necessary.
Aharonovitch made these remarks at the annual Duns 100 forum, where he also discussed the tax system's challenges amidst the war, the need to increase state revenue, and potential reforms. He addressed the controversy surrounding the proposed 'immediate VAT payment' reform, which would move VAT reporting and payment online at the time of transaction. Despite opposition from tax experts and business representatives who fear it will harm businesses and increase consumer costs, Aharonovitch described it as a "win-win" that would protect small businesses by aligning VAT payments with actual cash received, thereby reducing bureaucracy.
Regarding potential revenue-generating measures, Aharonovitch suggested exploring options that do not hinder economic growth. He expressed reservations about raising corporate taxes or the general VAT rate, despite the significant revenue a VAT increase could bring. Instead, he proposed reinstating property taxes on land, a travel tax on all vehicles, taxes on sweetened beverages and single-use items, and eliminating existing tax exemptions and benefits. He specifically mentioned taxing accumulated returns on study funds after they are released, reconsidering the VAT exemption in Eilat, and mandating reporting for rental income, which could generate an estimated 1.5 billion shekels annually. He also suggested examining the tax exemption on residential properties, valued at over 4 billion shekels per year.
Furthermore, Aharonovitch clarified the Tax Authority's stance on the high-tech sector, emphasizing support for companies registered in Israel. He acknowledged the current challenge of companies registering abroad and aims to reverse this trend by 2027, stressing the vital role of high-tech in Israel's economy and revenue collection.
