The Israeli Tax Authority (ITA) launched a temporary voluntary disclosure
procedure (“VDP” or “Amnesty”) in a circular dated November 15,
Time is now running out.
Israeli residents have until June
30, 2012 to report previously undisclosed overseas income and gains from
This action may confer immunity from criminal
proceedings, fines and interest and some relief regarding indexation for
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
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.
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 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
• 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.
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
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
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”).
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.
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
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.
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
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
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
Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.