The case was a general class action alleging the ITA lacked authority to go back more than 10 years according to criminal rules in the Income Tax Ordinance.
By LEON HARRISUS tax form (illustrative)(photo credit: INGIMAGE)
A district court has just ruled that the Israel Tax Authority (ITA) has authority to go back more than 10 years in tax amnesty cases (Nukrei vs. ITA 5356-05-06, of July 14, 2019).BackgroundIsrael has had a voluntary disclosure (tax amnesty) program since 2011. At first it was a flop, so in 2014 the ITA published new rules allowing anonymous amnesty applications by professional advisers on behalf of unnamed clients up to the end of 2018. The name is only revealed after a deal is struck.Unfortunately, there is a secret sting in the tail – the ITA doesn’t just tax income derived in the last 10 years, it goes back an infinite number of years.This is done by taxing opening capital from unproven sources 10 years ago, typically at rates of 10%-15%. This is rough justice, as few people or banks have records proving anything that far back.For example, supposing a taxpayer now discloses capital of NIS 5 million at the end of 2008 and annual income of NIS 100,000 in each of the 10 years 2009-2018.The ITA taxes not only the income of NIS 1 million, but also the opening capital of NIS 5 million unless the taxpayer has documents proving it was already taxed or exempt.The caseThe case was a general class action alleging the ITA lacked authority to go back more than 10 years according to criminal rules in the Income Tax Ordinance.AdvertisementThe judgmentThe court ruled the class action lacked merit for a number of reasons.The court ruled there is no time limit for civil (rather than criminal) cases where the taxpayer had not yet reported the income on a tax return.Also, the request for a tax amnesty is voluntary, and amounts to a “package deal.” The taxpayer agrees to pay the tax and in return is not prosecuted.“Such a request is not done as a heavenly matter, but due to a desire of the taxpayer to repent for his guilt and pay income tax.”In this particular case, the taxpayer had signed a tax amnesty agreement and now wished to amend it. The court ruled his advisers could have maintained anonymity and continued negotiating or withdrawn from the amnesty process.The court refused to apply a “blue pencil” to delete tax collected wrongly in the taxpayer’s opinion.CommentUntil this case was handed down, a lack of transparency prevailed. ITA officials denied there is written guidance on how far back they will go and whether the “concessionary” tax rates of 10% or 15% exist.The ITA aims to drive a hard bargain in tax amnesty cases. Therefore, the taxpayer and his advisers should hold out for a reasonable deal and seek to find different types of evidence proving that opening capital was indeed already taxed, for example, contracts, land registry records, stock exchange notification, probate documents and so forth.But the ITA may still ask for bank statements confirming the receipt of cash. Was a bank remittance note kept?The OECDIsrael is a member of the OECD. According to the 1960 OECD Convention, decisions and recommendations of the OECD apply to members unless they abstain from voting on them.The OECD has detailed recommendations on incomplete records in tax amnesty cases.“In a number of cases, in particular those where assets were hidden abroad by a parent or grandparent, the taxpayer may not be in position to provide complete records.In addition, record retention periods vary from country to country, and taxpayers may not be able to obtain records beyond a specific period (five or 10 years).While much will depend on the facts in each individual case, guidance could include both examples and statements of principle.Furthermore, clarity around the voluntary disclosure period (the number of years to be disclosed) would provide taxpayers with greater certainty about the outcomes of their disclosure.”Unfortunately, this OECD pronouncement was not mentioned in this case.It is also unfortunate the taxpayer didn’t hold out for no tax (or reduced tax) on opening capital before signing the tax amnesty agreement.By signing, the taxpayer received immunity from prosecution which the Court ruled was a sufficient quid pro quo for taxing opening capital. Other amnesty applicants should take note. It remains to be seen if an appeal will be filed.As always, consult experienced tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. leon@h2cat.com.
