Case Number

CA 6726/05

Date Decided

6-5-2008

Decision Type

Appellate

Document Type

Full Opinion

Abstract

Appeals challenging a decision by the District Court, which partly granted the appeal by the Appellant, who conducted business in states formerly within the Soviet Union, for income tax return for the years 1992-1996. The appeals primarily centered round the Respondent’s reasoning for prohibiting writing off expenses for commissions paid to the Appellant’s agents in the Soviet Union based on two alternative justifications: failure to properly prove the expenses and the unlawfulness of the expenses, which were payments of bribes. The Appellant argues that the sums it paid its agents abroad were made for purposes of its income and that the Respondent must deduct them as expenses. The cross appeal concerned the partial recognition as expenses of payments the Appellant made to agents as salaries.

The Supreme Court (in opinion written by Justice Rubinstein and with Justice Hayut and Elon concurring) rejected the appeal and the cross appeal and held that:

The deduction of sums paid as bribes must not be permitted due to the unlawfulness of these expenses. Such payments were unlawful were they made in Israel and it is sadly presumed that they were also unlawful in the country where they were made, thus they are tantamount to expenses made as an offense. Recognition of these payments as expenses for the purposes of tax deductions is inconsistent with the public interest. This outcome is justified also in light of the protected interests that are infringed by bribery: proper public administration and the public trust in law and government authorities. The fact that the unlawful activity was committed abroad does not mitigate their severity which is in fact exacerbated due to the development of business activity abroad. This is joined by considerations regarding a concern for harm to Israel’s foreign affairs and to its reputation. This outcome is also a result of considerations such as fair competition, increasing economic efficiency, conserving public funds, and fairness.

As for the evidentiary aspect, the Appellant should have demonstrated its claimed expenses. In an Income Tax Appeal the burden of proof is placed on the taxpayer, even when keeping admissible books, when there is a conflict about the bookkeeping. It is certainly the case when the tax payer seeks to demonstrate expense made in the course of creating an income. The Appellant challenges factual findings by the lower court, yet the matter of the believability of the evidence and the weight that ought to be attached to them are within the purview of the lower court, and it is not the course of the appellate level to intervene but fore rare cases that do not include the one at hand. Second, there is no place to intervene in the findings of the lower court, which balanced between the burden of proof placed on the Appellant and the evidentiary challenges it faced. The court did not reject all the expenses for lack of documentation and did in fact recognize some of the expenses.

As for the cross appeal, the payments made by the Appellant to agents for salaries – as expenses, were proven. And though advancing the transactions through bribery was part of the agents’ roll, it was not exclusive and it cannot be said that their salary was touched by unlawfulness to the extent that their recognition as expenses may be rejected.

Justice Hayut and Elon joined the above, but left for future consideration whether a general consideration is required for the issue of permitting allegedly unlawful expenses made by an Israeli tax payer abroad, as it does not necessitate a decision in these appeals.

Keywords

Tax -- Deductions

Download

Included in

Tax Law Commons

Share

COinS