Shekel money bills.
(photo credit: REUTERS)
The Israeli tax Authority (ITA) and Swiss Finance Ministry signed on November 27 a declaration of intent regarding the exchange of information about financial accounts. The aim is to enhance cooperation regarding the supply of information, “egalitarian enforcement” of taxation in Israel, truthful tax payment and limit black money.
This is within the framework of the Common Reporting Standard of the OECD. In May this year, the ITA director, Moshe Asher, signed the OECD’s Multilateral Competent Authority Agreement for the Common Reporting Standard (CRS Convention).
According to the announcement, the automatic exchange of 2018 balances by Israel is scheduled to begin in September 2019. But according to the November 27 announcement, commencing in 2017, the two countries will apparently start exchanging bank information upon request, since both countries have signed and ratified an earlier, more general agreement – Convention on Mutual Administrative Assistance in Tax Matters (MAAT Convention).
Upon request is not the same as automatic. It seems there will be a lot of legal hairsplitting when it comes to information exchange.
The MAAT Convention:
This entered into force in Israel on December 1, 2016, and will enter into force in Switzerland on January 1, 2017, according to the OECD.
It allows one country to request information relevant for the enforcement of their domestic tax laws whereupon the requested state shall provide such information if it concerns particular persons or transactions. In other words, no fishing expeditions. The ITA cannot contact the Switzerland Federal Tax Administration to request information about all Israelis with bank accounts in Israel, it can only ask about Mr X or transaction Y.
If information available in the tax files of the requested state is not sufficient, it shall take all measures relevant to provide the applicant state with the information requested. (Articles 4 & 5).
The CRS Convention:
This implements the OECD’s Common Reporting Standard (CRS). It entails an electronic system similar to the United States’ FATCA (Foreign Account Tax Compliance Act) system. But FATCA mainly covers the accounts of US persons and accounts in the US. The CRS applies to over 100 additional countries.
The CRS calls for automatic exchange of information by financial institutions of one country to the tax authority of the same country for onward forwarding to the tax authority in each country where the account holder is thought to have links, such as identity number, address, passport and phone number.
To sum up – timetable:
The ITA therefore will receive information automatically without asking for it, from Switzerland commencing in 2018. In 2017, the ITA will receive no information from Switzerland unless the ITA requests it.
What should affected Israelis do?
If you derived undeclared income from a Swiss bank account, the account may become known to the ITA in 2017 and almost certainly will in 2018. Moreover, Israeli banks are now required to look out for black money that should have been taxed in Israel or abroad under recent amendments to the anti-money laundering regulations and the tax law.
Israel residents became taxable on worldwide income in 2003 and before then in the case of worldwide capital gains. But individuals may enjoy a ten-year Israeli tax holiday regarding overseas income and gains if they first became Israeli residents on or after January 1, 2007, or returned to live in Israel after living abroad for over 10 years.
Anyone with a skeleton in the closet should consider applying for a tax amnesty (also known as a voluntary disclosure procedure or VDP). A problem is the deadline for applying to the ITA is December 31, 2016, which is less than a month away. Typically, in our experience, it takes longer to assemble the information and process it in order to apply to the ITA in the required format.
Therefore, shortcuts may be needed as the ITA amnesty deadline has already been extended several times and seems unlikely to be extended again.
The biggest problem:
What takes longest is proving the source of capital – for example, what was the source of an undeclared Swiss bank account? Was it exempt from Israeli tax or not? If it was exempt (e.g. pre-aliya capital, inheritance), the ITA currently insists on written proof even if this means going back decades, notwithstanding OECD guidance to be pragmatic about incomplete records.
To sum up, affected Israeli taxpayers and their advisers need to be both speedy and creative.
As always, consult experienced tax advisers in each country at an early stage in specific cases.[email protected] The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.