Yom Kippur is the time for repentance. For some, that includes making good on some past tax errors or omissions.
The big picture
The Israel Tax Authority (ITA) announced a new voluntary disclosure procedure (VDP, or “amnesty”) on September 7. ITA officials recently provided further verbal indications about the process.
It seems the ITA is finally joining the rest of the world.
Banks in Switzerland and elsewhere are no longer able to maintain full confidentiality due to international pressure. The US and UK have information- exchange agreements with Switzerland and virtually all the offshore jurisdictions. Details of Swiss bank accounts apparently have already passed to the US, UK, France, Germany, India, Australia and many other countries.
Israel has tax treaties with more than 50 countries, and they all contain information-exchange clauses.
Until now, Israel has responded a bit slowly to requests from treaty countries for information, but all that is about to change. Israel will soon give out and receive more tax-related information.
Israel and the US signed a Foreign Account Tax Compliance Act (FATCA) agreement on June 30.
This awaits Knesset ratification, but in practice implementation has already begun due to a Bank of Israel directive to the banks. Israeli banks must report many details about the account details to the ITA, starting July 1, to forward to the US Internal Revenue Service by the end of September 2015.
Israel is a member of the Organization of Economic Cooperation and Development. On July 21, the OECD published a finalized Common Reporting Standard. This is similar to FATCA but is aimed at OECD members and many more countries. It requires banks and other financial institutions to identify account holders’ countries of residence by 2016 and start reporting account details to the tax authorities of those countries starting perhaps in 2017.
The OECD works closely with the G-20 major economies. On September 21, the G-20 issued a communique that said: “We endorse the finalized global Common Reporting Standard for automatic exchange of tax information on a reciprocal basis, which will provide a step-change in our ability to tackle and deter cross-border tax evasion. We will begin exchanging information automatically between each other and with other countries by 2017 or end-2018, subject to the completion of necessary legislative procedures...
We support further coordination and collaboration by our tax authorities on their compliance activities on entities and individuals involved in cross-border tax arrangements.”
The new Israeli tax amnesty, in brief
The new procedure is in effect now and replaces an earlier 2005 procedure and temporary better procedure of 2011-2012.
There are two special tracks: an anonymous track and a fast track for smaller cases. In each case, if the matter was unknown, the ITA and state prosecutor may undertake to refrain from criminal proceedings.
However, the tax remains payable in full, and fines, interest and inflation indexation will still apply, unlike past amnesties.
Under the anonymous track, the taxpayer’s representative files a summary Form A with the designated official. The designated official then refers the application to the relevant tax office; namely, the income-tax assessing office, VAT office or land-tax office or Customs to determine the amount of tax due.
Within 90 days after the tax office receives the application, the applicant (taxpayer) is supposed to file Form B revealing the applicant’s name to enable the checking and handling of the application. In other words, the anonymity may only last 90 days.
However, the tax office may extend the 90 days by a further period of up to 90 days; i.e., up to 180 days. If at this point the applicant’s identity is not revealed, the amnesty application is rejected.
The amnesty fast track is available for applicants with no more than NIS 2 million to sort out and taxable income not exceeding NIS 0.5m. in the reported years. They file summary Form C with the designated official, who will refer it to the relevant tax office. That tax office will record the application and issue a tax payment voucher for the amount in the application.
If the tax is paid within 15 days after receiving the payment voucher, there should be no criminal proceedings regarding the subject matter of the application.
A fast-track application cannot be anonymous.
What does the ITA now say?
The ITA is offering the amnesty before using any new information it may have received or may soon receive about the billions of dollars Israelis have allegedly stored abroad.
The procedure is intended to be user friendly and not lead to protracted debates. The 90- to 180- day time limits are for reasons of “efficiency.” The amnesty is not available regarding illegal activities such as drug deals. Steps are being taken that are intended to prevent unauthorized use (not defined) of data received by the ITA. Applicants have a year to apply for the special tracks.Discussion
Most amnesty applicants the world over prefer an anonymous procedure. The previous Israeli amnesty of 2011-2012 was a nonstarter until after nine months the ITA started accepting anonymous applications.
Then there was a flood of applications, but not everybody submitted them in time. By coincidence, the final deadline then was the day after Yom Kippur in 2012.
The new amnesty limits anonymity to a period of 90 days, which the ITA may agree to extend to 180 days. It seems this was done partly to speed up tax officials’ handling of amnesty applications. The last time they were sometimes very slow, taking a year or two just to get started.
Once started, the amnesty process is not always simple and can take longer than 90 to 180 days.
The taxpayer’s advisers should prepare spreadsheet calculations for all relevant years. The treatment of exchange rates and losses can create issues. But typically the biggest issue is proving that the original capital is not untaxed income.
If the family fortune was generated abroad 20 or 30 years ago before making aliya, the paperwork proving this may not be around. Paperwork such as a probate document or asset sale document is preferable, not just a letter from the family lawyer.
Otherwise, the ITA has developed a habit of taxing unproven capital at rates ranging from 5 percent to 50% depending on circumstances and mood... This is in addition to tax on income on the capital, and all this is within 90 to 180 days.
In practice, some people won’t apply, some will apply anonymously and withdraw the application after 90 to 180 days, some will finish expeditiously, and some ITA officials might check if they can extend the period further.
If Israel wants to raise serious tax revenues from the latest amnesty, the anonymity deadline will have to be changed, The second issue relates to interest and fines on amnesty tax. Interest runs at 4% over the rate of CPI inflation, and there are numerous fines for late reporting and late payment. The exposure to these should be estimated before going into the amnesty.
The ITA does have authority to provide relief in good-faith cases, but it rarely does so.
The whole point of an amnesty is that people want to repent for their tax sins and the country needs the tax revenues – better late than never.
A separate trust amnesty was announced on March 9 this year. Applicants must apply by the end of this year.
New immigrants and returnees (after living abroad 10 years) will remain exempt from Israeli tax on overseas income and gains for 10 years. So the amnesty will usually not be relevant for them until after the 10 years are over.
We wish all our readers gmar hatima tova.
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 at Harris Consulting & Tax Ltd.