In the Tel Aviv 3 tax office there is a map of the world.
The joke is
that the whole world must pay Israeli taxes.
At the US Internal Revenue
Service (IRS) there is a similar map and a serious requirement for US persons
all over the world to pay US taxes. A recent addition to all this is the Foreign
Account Tax Compliance Act (FATCA).
According to the US Treasury, FATCA
was enacted in 2010 by Congress to target noncompliance by US taxpayers using
foreign accounts. FATCA requires foreign financial institutions (FFIs) to report
to the IRS information about financial accounts held by US taxpayers, or by
foreign entities in which US taxpayers hold a substantial ownership interest.
All this starts in 2014.
Recently, an Israeli government official gave
some insights on how FATCA is viewed here and how Israeli financial institutions
might start to comply with FATCA.
The following is a summary. Since
negotiations are ongoing between the US and Israeli governments, nothing is
final and conclusive yet.Scope:
US citizens, Green Card holders and US
residents (US persons) are covered by FATCA, and so are trusts under US court
supervision. Also falling within FATCA are financial institutions that accept
deposits (banks), hold assets for others and financial bodies that manage
portfolios or money for others and collective investment vehicles such as mutual
funds or hedge funds and treasuries of large groups.
If nothing is done:
If nothing is done, payments from US sources will be subject to a 30 percent
What’s needed are due diligence procedures for detecting
the accounts of US persons with balances of $50,000 or more. Periodic reports
are required to the IRS regarding the degree of compliance and 30% withholding
from payments to noncompliant persons, account closures and so forth.And
A committee to check FATCA has been set up, headed by Frieda Israeli.
Its members include representatives of the Israel Securities Authority, the
Israel Tax Authority, the Securities Markets and banking regulatory sections of
the Finance Ministry and the Justice Ministry.
agreement: To help deal with FATCA, the US government is offering an
intergovernmental agreement (IGA) with other countries. Among other things, an
IGA will list deemed compliant bodies and exempt beneficial owners. Compliant
bodies will benefit from reduced reporting obligations, waiver of withholding
obligation from compliant bodies, waiver of account-closure obligations and
waiver of due-diligence obligations.There are two types of IGA:
and Model 2. Under Model 1, the tax authority in the country concerned collects
financial information from FFIs and transfers it to the IRS in the US. In
Israel’s case this would be under the information- exchange clause in Article 29
of the US-Israel tax treaty, subject to a commitment to maintain
Model 1 is mutual.
Under Model 2, the FFI itself
enters into a commitment to collect and transfer information to the IRS. An
example of this is the IGA between Switzerland and the US. The information
transferred relates to accounts whose account holders waived secrecy. Model 2
isn’t mutual.Israel’s preference:
Israel has realized along with other
countries that FATCA won’t go away. Israel prefers a Model 1 IGA with the US for
reasons of (1) sovereignty (Israeli banks remain subject to Israel, not the IRS)
and (2) mutuality (Israel might get information back from the IRS about
Israelis). Financial and regulatory bodies in Israel also apparently favor Model
1.What will the Israeli-US IGA contain?
The US-Israel IGA is not yet
final. Nevertheless it is expected to include:
• Automatic information exchange;
Israel would need to transfer the account holder’s name, the TIN (Tax
Identification Number), account balances, income (dividends, interest and
• The US would transfer similar income information
(dividends, interest and capital), but not balances.
• As for timing,
initially it will only be necessary to identify US persons and their balances at
the end of 2013 and 2014. Ordinary income will also be reportable for 2015, but
not income from the sale of assets from 2016. The actual reporting will commence
by September 2015.
• Every Israeli FFI would be assumed to be compliant
and won’t need to withhold 30% US tax if they act as required under the IGA. If
there is an administrative error, the IRS would be able to turn to the banks in
Israel. If there is substantial noncompliance, the IRS would notify the Israel
Tax Authority and give it 18 months to check out the situation.
this would necessitate a number of legislative changes in Israel.
addition, information exchange with the OECD may be strengthened.
principle, a Model 1 IGA can be varied in negotiations.
However, if any
relief were to be granted to Israel, the IRS would need to apply the relief to
other countries that sign up to a Model 1 IGA.
To sum up: US persons will
soon find that Israeli banks must report details about them to the Israeli
government for forwarding to the IRS.
As always, consult experienced tax
advisers in each country at an early stage in specific
firstname.lastname@example.org Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd