We now live in a brave new age of greater information exchange between banks and tax authorities around the world, including FATCA and the OECD common reporting standard, etc. All this is due to technology.
To smooth the way, the tax authorities in many countries, including Israel, the US, the UK, Italy and South Africa, have offered voluntary disclosure procedures that offer a last chance to come clean – commonly known as tax amnesties.
How effective are these tax amnesties and are they attractive? Or are they too attractive and encourage people to hold off reporting and paying tax until another amnesty comes along? This attractiveness balancing act has caused heartache within the Israel Tax Authority and others. So now the OECD has published a good amnesty guide (GAG?), formally known as “Update on Voluntary Disclosure – A Pathway to Compliance.”
Israel, in general Israel taxes worldwide income of Israeli residents. There are currently four main Israeli amnesty programs: • Regular amnesty program; • Anonymous amnesty program; • Fast-track amnesty procedure; • Transitional arrangements for Israeli Resident Beneficiary Trusts.
The anonymous and fast-track procedures are available until September 6 (so hurry), the trust transitional arrangements are available until the end of 2015, and the regular amnesty is available until the end of 2016.
OECD guidance The latest OECD guide to “Offshore Voluntary Disclosure Programs,” published on August 7, contains a wealth of practical experience from 47 countries, but not Israel.
According to the OECD guide, well-designed voluntary disclosure programs can benefit everyone involved: taxpayers making the disclosure, compliant taxpayers and governments.
Voluntary disclosure programs can generally be grouped into two categories: permanent programs and temporary initiatives.
Taxpayers want reassurance that the financial terms on which their liabilities will be settled will not be prohibitive. They also want reassurance that once the disclosure is complete, they will not be unduly targeted for enhanced scrutiny in the future.
Typically, countries do not waive tax as part of their voluntary disclosure program.
If the program is presented as a oneoff opportunity, that presentation must be credible. Credibility could be lost and non-compliant behaviors reinforced if “special terms” are offered regularly with no obvious deterrent.
Therefore, many programs make clear that penalty (or in some cases interest) waivers as part of the program will be matched by tougher penalties to be applied once the program has ended.
When establishing the reporting requirement, the OECD says countries should take the opportunity to gather intelligence; that is information that could assist them in identifying other non-compliant taxpayers, promoters and schemes designed to shelter offshore holdings from detection.
To assist taxpayers, countries should issue clear guidance. As a best practice, guidance should explain how the tax administration deals with incomplete records and assets that have been undeclared by previous generations.
In addition, record retention periods vary from country to country, and taxpayers may not be able to obtain records beyond a specific period (i.e., five years or 10 years). Clarity around the voluntary disclosure period (i.e., number of years to be disclosed) would provide taxpayers with greater certainty about the outcomes of their disclosure.
Guidance could also set out the circumstances under which no criminal charges will be brought.
Tax administrations should indicate whether there is a facility, where taxpayers and/or advisers are able to have initial discussions without the requirement to disclose the identity of the taxpayer concerned.
How do most countries do? In all 47 countries surveyed by the OECD, the non-compliant taxpayer will have to pay the outstanding amount of tax. But two countries (Iceland and Poland) significantly increase the tax rate or tax base.
In most countries operating a general disclosure program (26 out of 38) the non-compliant taxpayer can avoid imprisonment through a voluntary disclosure.
In almost all countries taxpayers have to pay interest on tax evaded if their tax evasion is detected by the tax authorities and they have not made a timely and comprehensive voluntary disclosure.
Differences across countries in the level of penalty rates are striking. Close to half of the countries (19 out of 47) reduce the monetary penalties to nil following a voluntary disclosure by the taxpayer. But in a large number of countries the maximum penalty can be as high as (or even above) double the amount of undeclared income. One of the higher penalty countries is the US.
How does Israel fare? Israel joined the OECD in 2010 but is not one of the countries discussed by the OECD. So what follows are comments based on our experience.
Broadly, it seems the OECD follows the OECD principles with a few notable exceptions. The ITA has published guidance on its voluntary disclosure procedures. The ITA guidance is now fairly clear on most aspects – except trusts.
When it comes to trusts, the ITA has issued no clear guidance on “control or influence” by a beneficiary of a “foreign resident settlor trust,” resulting in uncertainty in the tax years 2006-2013.
Instead the ITA offers a compromise tax deal for trusts, just in case “control or influence” exists.
The ITA guidance does allow no-name voluntary disclosure applications to be filed by September 6.
Criminal sanctions may be avoided if the case was not under any form of governmental inquiry. The full amount of tax and interest and linkage on overdue tax must be paid. As for fines, it seems they may be levied, but this is not clearly spelled out. And there is a fast-track procedure for small cases (under NIS 2 million in capital; under NIS 0.5m. of previously unreported income).
As for the assessable period, Israeli law requires Israeli residents to report all overseas income arising since the beginning of 2003. However, there is unwritten practice of not always going back beyond the beginning of 2005.
Unfortunately, there are two main instances where Israeli voluntary disclosure procedures are extraordinarily tough by OECD standards.
First, the ITA does not give taxpayers a fair chance by waiting until the voluntary disclosure procedure period is over. In the last year, the ITA has launched a series of surprise raids and initiated criminal investigations without waiting for the disclosure deadline to pass. This is apparently contrary to the OECD recommendation of tougher penalties only once the voluntary disclosure program has ended (paragraph 38 of the OECD report).
Second, the ITA taxes not only income but also the underlying capital unless the taxpayer can prove it was not taxable in Israel. But if the capital was accumulated many years previously and/or by an older generation, and the records are incomplete, the ITA still taxes such capital at rates of 10 percent to 50% according to an apparently unpublished policy. The OECD indicates that in cases of incomplete records, it may be sensible to allow a pragmatic or simplified approach to the calculation of taxable income or gains during the disclosure period (paragraphs 45 and 46 of the OECD report).
Israel amnesty deadline As mentioned, Israeli residents should note the deadline is September 6 for applying to the ITA for an amnesty on an anonymous basis or on the fast-track procedure. After that, a regular amnesty on a named-upfront basis is available until the end of 2016.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
email@example.com Leon Harris is a certified public accountant and tax specialist