Tax on Wheels

In an important ruling given on May 23, 2019, the Israeli Supreme Court ruled that grossing up the tax value for leasing vehicles would be calculated on a regular and full basis, without distinguishing between “business” trips and “private” trips performed by the employee in the vehicle.

The Income Tax Regulations determine the formula for calculating the value of the benefit given to an employee in regards to the use of a vehicle that his employer has made available to him.

Many employers have adopted an interpretive approach according to which the benefit, which the employee is liable to pay tax for its value, refers only to the “private” use of the vehicle by the employee, as opposed to its use for work purposes.

As a result, technologies have been developed, that allow classification and documentation of the trips as “private” or “business”. In the relevance case deliberated in the Israeli Supreme Court two companies used this technology calculated the value of their employees’ benefits accordingly, so that business trips were not calculated for tax purposes. The employees of one company were managers, and the other company’s employees were renovations and maintenance workers, who carried out repair and maintenance duties even outside the working hours, and for this purpose their equipment was regularly kept in their vehicles. The Israeli Tax Authority rejected the interpretation adopted by these companies regarding the implementation of the tax laws and the matter reached the Supreme Court.

The Israeli Supreme Court has reverted to basic principles – providing a vehicle to an employee constitutes a benefit for the employee, and as such is a form of labor income, which is taxable. The efficiency of tax collection and certainty regarding fiscal norms are central public interests that are at the core of tax laws. Regulating the manner of calculation by means of a uniform and clear formula can promote the efficiency, simplicity and clarity of tax collection and thereby promote the purpose of preventing tax evasion. This rule allows the tax authorities to overcome the difficulties of proof, removes the burden of examining the claims of specific taxpayers, and increases legal certainty.

The Israeli Supreme Court ruled that granting a vehicle to an employee is a benefit that is not limited to the performance of “private” trips. Sometimes it is not possible to determine with certainty its value for the employee, for example, when upon giving the vehicle to the employee, it is the employer who absorbs the cost of handling the vehicle, passing it on the annual licensing test, and more. All of these, according to the Israeli Supreme Court, are “invaluable”. Providing a vehicle by the employer has many intangible advantages, the precise value of which cannot be estimated. Therefore, the position of the Tax Authority was accepted. The economic significance of this ruling regarding certain workers may be considerable, and so we recommend consulting how to handle them in this regard.

Drive safe!