Leon Harris

The Israeli Tax Authority (ITA) has just circulated a draft amendment to the Income tax Ordinance and the Prohibition on Money Laundering Law regarding Israel joining international tax information sharing agreements.

Background:

This amendment is needed to enable the Israeli government to ratify Israel’s FATCA agreement with the US signed on June 30, 2014 and the upcoming Standard for Automatic Exchange of Financial Information of the OECD, also known as the Common Reporting Standard or CRS..

Although the Israeli banks are starting to apply the US-Israel FATCA agreement pursuant to Bank of Israel instructions, this does not yet have the full force of law in Israel.

FATCA is the Foreign Account Tax Compliance Act, a US law which went global thanks to Intergovernmental FATCA agreements between the US and many other countries, including Israel.

The US-Israel FATCA agreement says that Israeli banks will start reporting details of US account holders and their accounts for 2014 onwards to the ITA, which will pass on this information to the US Internal Revenue Service (IRS) by September 2015.

Similarly, there is no law yet in force to enable Israel to sign up to multilateral tax agreements, such as the OECD CRS. Currently the Israeli tax law only allows the Israeli government to sign up to bilateral treaties for avoiding double taxation, not multilateral agreements and not information sharing agreements.

The intention was to let the Knesset enact an amendment in this area last year, but the Israeli  election and coalition process intervened.

What is now proposed?

With the above in mind, the ITA has circulated a draft bill. It requires approval by the cabinet and Knesset. If it is passed, the government will be able to sign international information sharing agreements such as the US-Israel FATCA agreement and to promulgate regulations on detailed aspects, subject to approval by the Knesset Finance Committee.

It is proposed that the ITA may share information pursuant to an information exchange treaty with the tax authority of another country at the request of the latter or spontaneously, but subject to a number of conditions.

First, it is proposed that the information must be required for enforcing the tax laws of the other country, applying means not prohibited to the ITA.

Second, it is proposed that the treaty must require the other country must maintain confidentiality.

Third, it is proposed that the information cannot be transferred in certain cases: if the security of the State of Israel, or the peace or security of its people may be affected; if an investigation in progress; or if the other country does not reciprocate without reasonable cause.

If an Israeli financial institution fails to carry out customer identification procedures, a fine of NIS 10,000 per month (apparently per case) may be imposed up to a maximum of NIS 600,000 per year per financial institution according to the proposal .

And if that information is not passed on in full to the ITA, the a fine of NIS 10,000 per month (apparently per case) may be imposed up to a maximum of another NIS 600,000 per year per financial institution.

Criminal sanctions are also proposed, including a 7 year jail sentence, for anyone seeking to prevent tax information exchange, including failure to identify the account holder at an Israeli financial institution, or report account information.

Comments:

A new age of tax transparency is dawning in the world and Israel will have to conform. The Israeli Tax Authority and Israeli financial institutions will soon be releasing private information to overseas tax authorities shortly, once the draft bill is enacted.

Israel is committed to complying with the US-Israel FATCA agreement by the end of September this year. The ITA has apparently requested extra time from the US, but it is unclear if this will be granted. Also, Israel has committed to implementing the OECD CRS by the end of 2018.

But all this won’t prevent information exchange now, perhaps on a more limited basis, under Israel’s existing tax treaties with over 50 other countries.

Therefore, anyone with a tax skeleton in their closet should consider initiating a voluntary disclosure procedure (“amnesty”) as soon as possible. In Israel, an amnesty can be requested on an anonymous basis by September 6, 2015 or on a named basis by the end of 2016. Professional advice should first be obtained. The anonymous basis is usually preferable to improve the negotiating hand, but is not available if a small amount of Israeli tax is at stake.

No  amnesty is available in Israel if an official inquiry is already under way. If the anonymous basis is desired, there is very little time to prepare and apply. In our experience, preparation matters.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

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The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.