The Israel Tax Authority (ITA) launched a new temporary voluntary disclosure
procedure (hereinafter: temporary VDP) last Tuesday.
have until next June 30 to report previously undisclosed income on foreign
(non-Israeli) assets. This action will confer immunity from criminal proceedings
and some relief regarding fines, interest and indexation.
an improvement over the older fixed Israeli VDP dating back to April 10, 2005,
which will partly apply until next June 30 and will fully apply again after that
The temporary VDP does not apply to assets held in Israel or to
foreign (non-Israeli) residents.
The following is an overview of the
ITA’s temporary VDP circular.Background
The ITA has stepped up its
efforts to uncover unreported property and cash held abroad by Israelis, and
more is promised in the near future. This follows what it refers to as “signs of
a slight stirring in bank secrecy observed in certain countries” (presumably
Switzerland, Liechtenstein and other offshore centers that have agreements on
tax information exchange).Criteria for the temporary procedure
to the ITA, the following is a non-exhaustive list of examples of cases where
the temporary VDP will 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);
made following or in parallel to an investigation or examination by a state
authority, according to the older fixed VDP.How does the temporary
Applications to apply the temporary VDP will be reviewed by a
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 to apply the temporary VDP
shall include the relevant facts and be filed at the office of the ITA director
under the heading “Application for Relief According to the Temporary Voluntary
Applications will undergo a preliminary review to
see if they meet the above criteria and deserve to be discussed by the
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
Applications meeting the above criteria will be confirmed
by the panel, and the applicant will be given immunity from criminal sanction
under the tax laws within the authority of the ITA, subject to the conditions of
the fixed VDP.
In addition, the panel will consider the tax consequences
relating to the application and will prescribe a civil-tax assessment, which may
be by means of agreement with the applicant.Outcome of an assessment by
The tax according to the assessment will not bear interest or fines.
In additional, the panel may grant relief regarding indexation (for inflation)
of the tax, and it may even cancel the indexation.Is this a
Under the old fixed VDP procedure, the local tax office
takes the place of the panel and there is no relief from interest, indexation
and penalties. There is immunity if the applicant is not under investigation
under both procedures. So it seems the temporary procedure mainly eliminates
interest and penalties, which can be material if tax is paid years
• It is unclear whether anonymous applications can be
• Presumably, as this will be a civil procedure, the
panel’s conclusions will not be published.
• If so, will there be
safeguards to ensure transparency? This is important as the list of criteria are
“non-exhaustive,” meaning the panel apparently has discretion about accepting
• Difficulty may arise in cases involving unreported income used
to buy assets in Israel rather than abroad.
• If a case does not meet the
criteria because an investigation or an examination is under way, will the ITA
become precluded from using information included in the VDP application? It
• Restricting the temporary VDP to Israeli resident
applicants will cause problems, in particular for foreign trustees of trusts
that are taxable in Israel (e.g., if the settlor is/was an Israeli resident).
The new Israeli tax regime of 2006 deems the trustee to be “assessable and
chargeable to tax” unless the trustee and the settlor or beneficiary(ies) agree
• Is the above discriminatory under Israel’s tax treaties with
50 other countries? It could be under the Israel’s tax treaties with the US and
Canada, but most other tax treaties don’t yet address trusts, resulting in
uncertainty. Specialist Israeli advice should be obtained in all trust
• Unreported income from foreign assets received by way of
inheritance or gift from an Israeli resident are not covered by the temporary
VDP. So the heirs of a recalcitrant Israeli resident taxpayer will be barred
from using the temporary VDP.
• If tax was paid abroad on the foreign
income concerned, this can, in principle, be credited against the Israeli tax
This means lack of past disclosure may sometimes be remedied under
the temporary VDP with little tax damage.
• US citizens or green-card
holders living in Israel have a harder time; they can only claim a foreign tax
credit for US federal and state (not city) taxes paid on US source income, not
on European source income, for example.To sum up
The temporary VDP is
generally worth considering in applicable cases if an Israeli resident has a tax
skeleton in the closet. The procedure not only offers immunity from criminal
sanctions, but also immunity from interest and penalties.
application should be made by next June 30 after checking things out.As
always, consult experienced tax advisers in each country at an early stage in