Re: Israeli tax amnesty – time is running out

The Israeli Tax Authority (ITA) launched a temporary voluntary disclosure procedure (“VDP” or “Amnesty”) in a circular dated November 15, 2011.

Time is now running out.

Israeli residents have until June 30, 2012 to report previously undisclosed overseas income and gains from non-Israeli assets.

This action may confer immunity from criminal proceedings, fines and interest and some relief regarding indexation for inflation.

This represents a big improvement over the regular Israeli VDP of April 10, 2005 which will apply again after June 30.

The following is a recap of the above Circular of the ITA.

Background:The ITA has stepped up its efforts to uncover unreported property and cash held in Switzerland and elsewhere abroad by Israelis and more is promised in the near future.

Criteria for the temporary procedure: 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).

When does the temporary procedure not apply: 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.

How does the temporary Amnesty procedure work? Applications to apply the temporary Amnesty are reviewed by an ITA panel led by the ITA legal adviser, together with the ITA deputy director for investigations and intelligence, the deputy director for professional matters, and the deputy general for audit.

Applications should include the relevant facts and be filed at the office of the Director of the Tax Authority under the heading “Application for Relief According to the Temporary Voluntary Disclosure Procedure.”

Applications will undergo a preliminary review to see if they meet the above criteria – in particular that the applicant is not already under investigation.

Process after acceptance: Applications meeting the above criteria will be confirmed by the panel and the applicant will thereby be given immunity from criminal sanction under the tax laws within the authority of the Tax Authority, subject to the conditions of the fixed voluntary disclosure procedure.

In our experience to date, the panel will want to know upfront the potential tax at stake, presumably for their statistics. After that they refer applicants to a local tax office which will review and negotiate the tax liability.

The panel typically stipulates a timetable for finishing the process and paying the tax.

Amnesty Outcome: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.

What if you get turned down: 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.

Will the Israeli Tax Authority turn nasty? This question is frequently asked. It seems that once the panel accepts an Amnesty applicant, the panel undertakes not to embark on criminal proceedings provided the timetable for finishing the assessment process and paying the tax is met.

Is there enough paperwork? In practice, the ITA tend to apply a pragmatic approach regarding documentary evidence from abroad – but don’t take liberties.

Some financial institutions release statements only if specifically requested (“hold mail”).

Some financial institutions claim to have difficulty providing annual summaries of investment transactions – but may be prepared to do so for a fee. Others keep poor records of the cost of investments later sold. Instead they may send a mass of investment purchase and sale notes to piece together like a jigsaw.

It may be advisable to resolve all these issues and prepare the relevant Israeli tax calculations before applying for the Amnesty.

But as mentioned, the present amnesty must be requested by June 30, 2012, so time is of the essence now.

Are Olim Off the Hook? Some Olim may have nothing to worry about. They are exempt from reporting, and tax in Israel on non-Israeli source income and gains for 10 years if they first became residents in Israel on or after January 1, 2007. This also applies to people who returned to live in Israel after living abroad 10 years if they returned on or after January 1, 2010. Different, more limited tax exemption rules apply to people arriving in Israel before the above dates.

To sum up: If anyone has undeclared income from overseas accounts which they want to use or pass onto the next generation, they should consider the present Amnesty before it’s too late.

The elimination of interest and penalties can be a major advantage where income has not been reported and taxed for many years. The criteria are “non-exhaustive” meaning the panel apparently has discretion about accepting cases. The criteria appear to be aimed at excluding untaxed Israeli source income which has been shipped abroad.

If tax was paid abroad on the foreign income concerned, this can, in principle, be credited against the Israeli tax due. This means lack of past disclosure may sometimes be remedied under the temporary Amnesty with little tax damage.

Specialist advice should be obtained regarding all aspects of the Amnesty voluntary disclosure procedure. And allow time, as preparing and negotiating are time consuming processes.

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

leon@hcat.co

Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.