Attorney-general Elyakim Rubinstein opposes allowing the Knesset's Finance Committee to discuss changes to the proposed the tax reform that have not gone through the government filter.

Rubinstein yesterday asked Finance Minister Silvan Shalom to block debate on the changes before they are approved by government, TheMarker has learned.

A panel headed by CPA Yair Rabinovitch submitted its tax reform proposal to government a month ago. The proposal passed the first of three Knesset readings. The next phase in the legislative process is discussion by the Finance Committee.

At this stage, however, the panel sought to introduce over 100 amendments to the proposal. The amendments have not been discussed by the government.

One of the proposed changes involves "transparent companies" that serve as tax shelters. Rubinstein claims that the panel members want to introduce a change, that contradicts another law already approved by the government.

Lachman-Messer: Hurting Israel's image

Rubinstein's letter to the finance minister appended a memo issued yesterday by his deputy, Davida Lachman-Messer, regarding that specific issue.

In her memo, Lachman-Messer claims that certain changes the Rabinovitch panel wants to make to the reform proposal contravene the law.

Specifically, she points at so-called transparent companies, in which profits and losses are related, for tax purposes, to shareholders instead of to the company.

"The entire arrangement for transparent companies has been substantially changed," she charges. "The arrangement has become far broader than the Rabinovitch panel originally proposed, and far beyond the government's legislative proposal."

The government bill allows only Israel-registered companies to serve as "transparent companies," she points out. But the suggested change would extend that privilege to companies registered abroad.

The expansion arouses several problems, Lachman-Messer claims. Also, because of the urgency of pushing through the reform, the government bodies such as the Justice Ministry, and Income Tax Authority do not have the time to thoroughly examine the issues that the changes create, she says.

The amendment would allow Israeli taxpayers to offset losses incurred abroad without limitation, she charges, despite the difficulties regarding accurate regulation and reporting of such losses generated outside Israel, and the loss to the State of Israel in tax revenues.

Also, the original arrangement, to which the Justice Ministry had agreed, allowed foreign investors to invest in Israeli transparent companies, but prevented Israel from turning into a tax shelter by abuse of the mechanism.

The amendment that the Rabinovitch panel proposes would allow foreign investors investing in Israeli transparent companies not to pay tax in Israel, or in the foreign country where the revenue was generated, Lachman-Messer claims. Israel would turn into a tax shelter for foreign investors.

It could hurt Israel's status in the international community, Lachman-Messer says, and hinder its efforts to join the OECD.

Another problem in the amendments allows a company that breaches the terms of the law to liquidate itself, and not pay tax, within two years. That means that a transparent company that wants to restore its status as a non-transparent company can breach the rules of the law, voluntarily liquidate itself, get its tax break, and re-establish itself as a non-transparent company with all the assets of the liquidated transparent company and all this would be tax-free, she says.

Her final conclusion is that the Rabinovitch amendments must not be brought before the Finance Committee before going through government.

Rabinovitch rebuts: Her reps approved the changes

Rabinovitch responded that the panel had convened after the original bill had been submitted to Knesset, and that members of the Justice Ministry had participated in the talks in Lachman-Messer's name. He said that the Justice Ministry officials appearing for Lachman-Messer had approved of the changes.

Rabinovitch rejected Lachman-Messer's charges regarding transparent companies turning Israel into a tax shelter, saying the intention was to facilitate investment in multinational projects carried out in Israel.

Attorney Avi Alter, a member of the Rabinovitch panel, told TheMarker that "Davida Lachman-Messer is trying to frighten the public." He said the changes regarding transparent companies had been introduced at the behest of Income Tax Authority chief, advocate Tali Yaron-Eldar, and with the acquiescence of all the panel members, andwith the knowledge of Lachman-Messer herself.

Most of the changes regarding transparent companies restrict their use, Alter said. The only expansion is to include foreign companies in the arrangement, and that change is of little significance, he said.

The change will not hurt Israel's chances of joining the OECD, Alter added. The whole world has such arrangements for foreign investors. The United States alone has three or four types of companies of the kind, he said.