The financial future of 9 million Americans worldwide and hundreds of thousands living in Israel could be at stake.
According to a recent petition to the High Court of Justice filed by the Republicans Overseas in Israel (ROI), the Israeli government has taken the wrong side in a world war that the US is waging over taxes and private banking information of its overseas dual citizens and residents.
ROI is arguing that at its core, the dispute is about fundamental privacy rights of dual citizens as well as whether they are being unequally compared to other Israelis.
How did the Republican party get cast in the role of seeking judicial intervention to defend civil liberties in a country which has no constitution and when conservatives in both the US and Israel tend to want the Supreme Courts to stay out of things?
The war started as an American war on large-scale worldwide tax evasion by overseas US citizens in Israel, but also across the globe.
It was also put forth to plug a budget hole created by major US legislation to spur job growth in 2010.
US tax officials have testified to the US Congress that there are no reliable statistics on how many overseas US citizens were evading taxes and how much revenue was being lost.
However, some officials claimed that the US was missing between $40-100 million and FATCA was estimated to be able to bring in $800 million in revenue.
Lawyer Marc Zell, who filed the petition on behalf of ROI American citizen and Israeli resident Rinat Schreiber, said from that original and legitimate goal of curbing tax evasion that the tax train has run off the tracks.
Even though the Republican party is an American party and it could not fight against US legislation before an Israeli court, a single Israeli citizen can apply to the High Court, and morally, Zell can claim to represent the around 85% of dual-citizens who voted Republican in the last US presidential race.
His petition stated that the US passed the Foreign Account Tax Compliance Act (FATCA) law in March 2010 obligated all foreign financial institutions to transfer to it information about overseas citizens and green card holders.
On April 6, 2014, the Israeli Supervisor of Banks consented to transfer the information, while also committing to anchor the massive new change in tax and financial information sharing in domestic legislation before the Knesset.
Very quickly, Israeli financial institutions started to transfer dual citizens’ banking information to the Israeli Tax Authority who is passing on the data to the US Internal Revenue Service.
While there was an immediate push to make Israeli banks comply with the new, costly and burdensome information sharing requirements, the corresponding Knesset legislative process moved forward slowly.
Even as recently as November, the Knesset Finance Committee was having trouble moving forward with the bill due to concerns about violation of dual Israeli citizens’ privacy rights with MK Moshe Gafni (UTJ) claiming foreign tax authorities treatment of Israeli citizens “is often influenced by extrinsic considerations.”
This is another of Zell’s objections to the current policy – that the information transfer preceded the Knesset comprehensively addressing the issue.
But back to the heart of the matter: What are the fundamental privacy rights and equal treatment concerns?
ROI’s petition claimed that the new information sharing process is not only beyond government officials’ discretionary authority absent Knesset legislation, but also in violation of the Basic Laws which create certain property and privacy rights defending against an automatic transfer of personal data absent a reasonable chance to object (currently there is no chance to object.)
In courts in many countries, including now Israel, the argument is, that the FATCA law and how foreign countries are implementing, means it functions as a dragnet of massive amounts of private information which could be misused and where there is no evidence of wrongdoing.
Zell explained that “we are not saying the Israeli tax authorities are prohibited from transferring information to the IRS or other foreign tax authority…where there is a reasonable basis to suspect tax evasion.”
He said that Israel can already do this under existing conventions and that the problem is to “collect and transfer such data to foreign governments without a showing of cause and without allowing the affected taxpayers an opportunity to be heard before the information is transferred.”
The equal treatment issue is that only dual US citizens are being treated this way by the Israeli government, and not persons who are dual-citizens of any other countries, let alone most Israelis who are solely Israeli citizens.
The application is most “absurd” said Zell with cases of persons who merely have an American greed card.
But so far other litigation against FATCA and its consequences have had mixed results, with lawsuits in the US and Canada being initially dismissed and currently pending appeal.
One problem is there is no obvious alternative to FATCA to curb tax evasion.
A withholding tax on capital gains is what many other countries do, but this would likely be dead on arrival in the more business friendly US.
Voluntary disclosure with offers of amnesty for past tax infractions has worked in some places, but had mixed results in others.
What position is the Israeli government likely to take?
Although the government has approved the agreement, the relevant legislation giving the government authority to collect and report the relevant financial information has not yet passed through the relevant Knesset committees or the required three readings.
If the agreements is overturned, the Finance Ministry is concerned it will both set a dangerous precedent, and also invite US sanctions.
Israel signed its agreement with the US regarding FATCA after extended negotiations in order to ensure that a US law imposing steep financial sanctions wouldn't kick in and deal Israel's financial institutions a serious blow.
There is also concern that if the court blocks the agreement, it will be harder for Israel to sign any international economic agreement in the future, which would severely limit its options for improving international trade and financial relationships.
On record, the Justice Ministry would only say that it will publicize its position when it files its response to the High Court.
Some of this tax war now before the High Court could come down to the court’s appetite.
The High Court might want to avoid this kind of a hot potato issue and decide to focus on procedural issues, such as the fact that legislation on the issue, however stuck, is before the Knesset.
Many fundamental constitutional debates before the High Court have died a slow death on the shelf waiting months or years for the Knesset to decide its position on an issue before the court views the issue as “ripe” for stepping in.
But what if the High Court is ready to get its hands dirty and look seriously at the competing claims?
“If the Court addresses the merits of the case, I believe our chances are quite good… The action of the Bank of Israel is highly problematic, given that there was absolutely no statutory basis for its action…. The Government Decision…directly infringe[s] upon fundamental rights and no attempt was made to mitigate the damage,” stated Zell.
He also said treating American-Israelis differently is “clearly discriminatory…There is no easy answer to that... the Government simply disregarded the privacy interests of the affected class, signed what is effectively an adhesion [coercive] contract and paid no attention whatsoever to the fact that the US Government…does not provide adequate protection for private information,” confirmed he said by the European Court of Justice and Israel’s Justice Ministry.
As Zell said, “taxpayers have a fundamental right of privacy protected by Basic Law and statutory law. The Government sought to nullify these rights with the wave of a hand and the Knesset thus far has said no. We hope the High Court of Justice will agree.”Niv Elis contributed to this report.
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