The war on ‘black capital’

Voluntary disclosure program tackles the problem of unreported capital.

December 28, 2014 15:40

Shekel money bills. (photo credit: REUTERS)


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 If I had to summarize 2014 in one sentence, based on the economic and law-enforcement aspects, I would say that first of all, this year represents a “step up” in the war that the Israel Tax Authority (ITA) leads to reduce the “black capital” (unreported capital) phenomenon in an attempt to increase the circle of those obligated to submit financial statements.

In the past, businessmen and Israeli artists, who perform in Israel and overseas, were those who spent a significant amount of time abroad; there was a doubt concerning their residency, and as a consequence their tax liability was unclear. In the past year, the ITA has expanded the supervision as it operates a bigger project of identifying new “clients,” including capital-market investors.

In the late 1990s, Israeli citizens were legally allowed to hold real-estate and financial assets abroad, and the revenues were not taxable in Israel.

However, in 2003 there was a change in the Israeli tax system, the essence of which is in personal taxation, rather than territorial, as it was for many years before the late ’90s. Starting from that point, the taxpayer was obligated to pay taxes whether his capital and assets are in Israel or abroad.

Nevertheless, the Income Tax Regulations exempt many individual taxpayers from the obligation to submit annual report to the ITA, according to conditions that are published each year. Usually, those exempted from such obligations are salaried employees with a certain income shelf.

As part of the ITA’s operation aimed to increase the number of those who have to report to the Income Tax Department on a regular basis, a legislative amendment to the Income Tax Regulations was published a few months ago, determining two essential principles:

1. An individual whose taxable income or the taxable income of his/her spouse exceeds NIS 811,560 (including all sources of income) will not be exempted from submitting an annual report to the Income Tax Department.

2. A capital-market investor usually will not be obligated to submit a report, unless he executed a large amount of acquisition or sales transactions that make his activity business oriented rather than capital oriented. Another case when a capital-market investor has to report is if he is holding 10 percent or more of a certain company, which makes him a controlling shareholder.

This amendment also states that individuals with income from securities traded on the stock exchange will not be exempt from submitting the report if the turnover of their income from securities exceeded NIS 811,560 (up to the point this amendment was implemented, the shelf was NIS 1,850,000).

The aforementioned amendment is retroactive and also applies to reports to be submitted from 2013. The ITA has granted a special extension for such taxpayers until December 31, 2014.

Increased activity

These and other actions are an example of the extensive activity of the ITA in an attempt to increase the number of those who have to report on a regular basis.

Moreover, the policy has been implemented extensively in the recent year, mostly by the influence of the United States, which forces all countries to sign agreements of banking information disclosure (FATCA), encouraging a policy of collecting information and exposing all those who have not paid their taxes as required. In such a way, countries that collect information also provide that information.

Last July, an agreement was signed between the Israeli and US governments regarding the improvement of international tax enforcement and the implementation of the FATCA (Foreign Account Tax Compliance Act) regulations. The agreement regulates the submission of information to the US Internal Revenue Service via the ITA, which will obtain the data from the financial entities in Israel. The information to be provided will include the details about financial accounts in Israel held by US citizens or residents, or by those with a Green Card who own a legal entity held primarily by Americans.

According the agreement, the first date to disclose the information to the US is September 30, 2015.

The information to be disclosed, as stipulated in the agreement, will include data on holders of American accounts and their balance as of the end of 2014.

This is actually a significant collaboration in the field of taxation between the countries, and it has a special meaning in this age of globalization and a global business deployment.

Modern technology

Modern digital technologies allow the enforcement agencies to make the information accessible under the current circumstances that almost any type of information can be revealed. Moreover, it turns out that in many cases, tax authorities in various countries have efficient intelligence abilities that enable finding out the sources of a certain taxpayer’s income.

Furthermore, the trends emerging through sharing and exchanging information between OECD member countries, arising from the organization’s decision to inspire all member countries to disclose information, drastically reduce the element of confidentiality but also significantly increase the risk of exposing assets and revenues to tax authorities.

In my opinion, such trends should prevent any person holding unreported financial and real assets (mainly not in Israel) from sleeping well at night, since such person is exposed to criminal sanctions in addition to the tax due and the expected fines that will be imposed on him for not reporting.

As someone who has been providing support and consulting services to business corporations and private businessmen for many years, I was exposed to errors made in financial statements, while many times such mistakes were made “in good faith” or were caused by a lack of legal knowledge. Nevertheless, the failure to report income and wealth is undeniably considered as a criminal violation, and the sanctions may be severe, whether it was done deliberately or not.

Voluntary disclosure

To avoid such horror scenarios, it is recommended to seek professional counseling as soon as possible and, afterward, to contact the ITA and apply for the voluntary disclosure program, which provides immunity from criminal prosecution and allows making the necessary arrangements to pay the civil tax debt as required.

The voluntary disclosure program may assist in using the assets legally, both in Israel and abroad.

One of the options approved by the ITA is that the applicant can remain anonymous and submit his application for voluntary disclosure without the name of the unreported assets owner.

The full name will be disclosed to the ITA only after reaching an agreed settlement with the tax assessor concerning the income taxation.

Such an option is limited to one year from the temporary order publication date, as of September 7, 2014.

In my opinion, an Israeli resident who wishes to avoid being exposed to criminal law and to reduce tax liability concerning the income from the taxable funds should consider contacting the ITA with the help of a professional expert, an accountant or an attorney experienced in the voluntary disclosure program, who will assist by providing the following services:

• Consulting on the subject of choosing the most suitable option within the program.

• Assistance in filling the documents and preparing all necessary approvals.

• Submitting the application and discussing the situation with the ITA to achieve an optimal amount of tax to be paid.

• Following and controlling the process until the final approval of the application by the ITA.

In such way, it is possible to neutralize the fear of criminal exposure and prosecution and, in some cases, achieve beneficial agreements, since it might be a win-win situation for both parties: The state will increase its revenues, and the taxpayer will be able to pursue his business endeavors confidently and safely.

Reuven Shiff is a managing partner and one of the founders of RMS Shiff Hazenfratz & Co. C.P.A. (Israel) and the former president of the Institute of Certified Public Accountants in Israel. RSM Shiff Hazenfratz & Co. is a member of the RSM International network, which ranks No. 7 worldwide and won the prestigious “Network of the year for 2013.”

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