Your Taxes: Tax amnesty extended and improved

The Israel Tax Authority announced Tuesday an extension of the Israeli tax temporary amnesty for foreign income by three months from June 30 (Shabbat) to September 27 (the day after Yom Kippur). We reviewed the temporary amnesty on May 31 (“Israeli tax amnesty – time is running out”). The amnesty is formally known as a “voluntary disclosure procedure” because it enables taxpayers to come forward voluntarily.

Why the reprieve?
According to ITA director Doron Arbeli, the decision to grant an extension to the amnesty was taken after many requests from taxpayers and their representatives, who had not finished preparing their amnesty applications, and as an integral part of the ITA’s strategy of increasing confidence, transparency and listening to the public.

But after the above date, he said, no relief will be granted for those who fail to exploit this window of opportunity, and the ITA will apply all its civil and criminal powers.

Anonymous applications accepted
The ITA announcement includes some interesting “clarifications.”

The ITA will now allow anonymous applications to be made in the above three-month period to ascertain the resulting tax liability before formally applying for the amnesty. The applicant should apply to the Tax Director’s Bureau and specify all the required information including, among other things: the amount capital accumulated abroad; the types of income accumulated over the years; the source of the capital abroad; list of documents held by the applicant to verify his above-mentioned declarations; the local tax office that handles the taxpayer’s tax file, and if there is none, the place where the applicant permanently resides.

All this can be done without identifying the applicant at this stage. The anonymous application will be referred to the relevant tax office for processing in conjunction with the applicant’s representative to determine the amount of tax due.

If the applicant decides to enter into the amnesty, he must then lodge an application under the ad hoc amnesty arrangement, presumably on a named basis.

What’s on offer?
The deal on offer under the temporary amnesty is basically: pay the tax; no interest or penalties on the overdue tax (which can otherwise be substantial); no criminal procedures; indexation for inflation may be party or wholly abated ; applicants must identify themselves, but their names should not be published.

Criteria for applying
According to the ITA, the following is a non-exhaustive list of examples of cases where the temporary VDP may apply: unreported income from foreign assets received by way of inheritance or gift from a foreign resident; unreported income from foreign assets acquired with money derived from income generated in Israel or abroad on which tax was paid or no tax was due in Israel; unreported income from foreign assets on which the liability to tax arose since the 2003 tax year, following the Israeli tax reform of 2003 (which made Israeli residents taxable on worldwide income instead of Israeli-source income).

The temporary procedure does not apply to assets and income derived from: a “crime” under the Penal Law (defined in Section 24 as an offense carrying a punishment of more than three years); applications made following or in parallel to an investigation or examination by a state authority.

Applications not meeting the above criteria will not be dealt with by the panel. Nevertheless, according to the ITA circular, “no use will be made in the criminal and civil arena with the information included in the application.”

Statute of limitations?
No criminal proceedings may be initiated 10 years after the tax year in which a tax offense was committed, according to Section 225 of the Income Tax Ordinance. But the amnesty is a civil, not criminal, procedure, so the ITA might try to clean up all years concerned. On the other hand, Israeli residents were usually exempt from Israeli tax on most (not all) types of foreign-source income before 2003. But pre-2003 capital gains of such persons were always taxable in Israel and remain exposed.

Comments
The ability to quantify the tax hit anonymously before formally applying for the amnesty is likely to reassure some hesitant or mistrusting taxpayers. If they don’t like the deal, they can walk away and stay anonymous. Their professional representatives should to be asked to reach an acceptable written tax-assessment agreement (“ruling”) before disclosing any identifying details.

In our experience, disclosure of the taxpayer names can be left to the end and might be made a condition for activating such an agreement.

There have been instances in which the ITA has sought to deny utilization of foreign losses due to late reporting, based on a disputed interpretation of certain provisions in the tax law. Hopefully, the ability to walk away will improve the taxpayer’s negotiating hand.

The relief from interest and penalties on overdue tax can be a substantial benefit in some cases if income has not yet been reported for a few years.

Don’t forget to claim any applicable foreign tax credit.

In practice, information provided by a number of foreign institutions is surprisingly incomplete, necessitating approximations.

For example, the cost and purchase date of securities sold is not always available. Some financial institutions even expect investors to make do with year-end totals. It seems that listing information available might be a prelude to negotiating Israeli taxes due based on such incomplete information. This should improve the ITA’s chances of a successful amnesty.

The taxable period has been left vague. Is it all years from January 1, 2003, when Israel adopted worldwide taxation of Israeli residents (except new immigrants in their five- to 10-year Israeli tax holiday for overseas income and gains)?

As always, consult experienced tax advisers in each country at an early stage in specific cases.