Once upon a time, there was complete bank secrecy in Switzerland and elsewhere. Not any more. Now a new age of transparency is dawning and it may be time to come clean before getting cleaned up.
The international backdrop:
The US is starting to implement the Foreign Account Tax Compliance Act (FATCA). It is an American law but it is backed up by intergovernmental agreements between the US and many other countries including Israel. To complement FATCA, the OECD is instituting a common reporting system (CRS) connecting up most other countries in the world, including Israel.
As a result, financial institutions everywhere will become the world’s tax police, scooping up financial data about all of us and passing it on to the government of every country we have a known link to. All this is about to begin.
The legal framework is being been laid, the computer systems will soon be in place.
To speed up implementation, each country may sign up to a multilateral instrument (= treaty), instead of renegotiating all their bilateral tax treaties.
Since 2003, Israeli residents have been taxable in Israel on their worldwide income. Over the last two years, the ITA has been sending Form 5329 to over 100,000 Israeli residents who do not pay taxes.
This form asks them to summarize briefly their assets and sources of income. Recipients are given 30 days to reply (but the forms typically only arrive towards the end of the 30 days!) and there is bar code to enable the ITA to check who did reply and who didn’t.
Israel has now passed the necessary legislation to implement FATCA and OECD initiatives and including the multilateral instrument.
The Bank of Israel has instructed the Israeli financial institutions to cooperate. FATCA should be operational between Israel and the US in September this year. And Israel is set to implement the OECD CRS in 2018, meaning disclosure by financial institutions of account data from January 1, 2017. Some countries will be implementing the OECD CRS a year earlier.
Anyone with a skeleton in the closet should consider going for a tax amnesty (voluntary disclosure procedure) by June 30, 2016 as explained below.
More about FATCA:
Israeli financial institutions will soon start forwarding info about accounts held by US persons to the Israeli Tax Authority to pass on to the IRS in the US. And US financial institutions should soon start forwarding info about accounts held by Israeli residents to the IRS to pass on to the Israeli Tax Authority (ITA). The start date of September 2015 was postponed to September 2016 due to technical reasons.
Information being disclosed includes balances from 2014, income credited from 2015, capital gains data from 2016. Account holders in Israel and elsewhere are being asked to fill out forms about themselves – W8 for non-US purposes, W9 for US persons. Getting the forms wrong counts as perjury under US law. And failure to fill out a form may lead to 30% US withholding tax or even denial of service.
More about the OECD CRS:
The OECD CRS rules are a carbon copy of FATCA, on purpose to make it easy to implement. Financial institutions must check the residency criteria of every account holder in their electronic files. If the balance is over $1 million, they must check this with the account manager. And for all new accounts, would-be clients must fill in a “self certification form” – in practice existing clients of financial institutions in Israel and elsewhere are being asked to fill in such forms.
Our experience is that each form of each bank is slightly different – read it carefully. The OECD system (like FATCA) requires the financial institutions to identify “indicia” (indicators) of each country to which the account holder appears to be linked – address, passport, identity card and even telephone number (e.g. a 972 number equates to Israel).
Currently 56 countries are in the OECD first wave, with financial institutions reporting from 2017 onwards about account data from 2016. These countries include France, South Africa and the UK.
And 41 countries are currently in the OECD second wave, with financial institutions reporting from 2018 onwards about account data from 2017. These countries include Australia, Canada, Switzerland and Israel.
Any person, company or trust with a hidden bank account is now on borrowed time and should take advice. Various alternative course of action may or may not be feasible. In many cases, a tax amnesty (voluntary disclosure procedure) should be considered in each relevant country.
In Israel, there have been successive rounds of amnesty. The ITA announced last September 21, 2015 that the latest amnesty had already yielded 3,832 applications involving NIS 10.6 billion of black money.
How the Israeli Amnesty Works:
There are three alternative Israeli tax amnesty tracks: regular, anonymous and fast. The deadline for applying for the regular amnesty track is December 31, 2015.
The deadline for applying for the anonymous or fast tracks (usually preferable) is currently June 30, 2016 – not far off.
The anonymous track means the taxpayer’s name is only disclosed at the end of the amnesty process if all went well and is supposed to be over in 90 – 180 days (unusual in practice). The fast track is meant to be over within 45 days (sometimes happens). As for trusts, additional rules and possibilities exist.
Usually the ITA accepts disclosure of unreported income going back to the beginning of 2005. An amnesty is not available if the taxpayer is already under Israeli governmental inquiry of any sort. As for Form 5329 (see above), there has been uncertainty – is it an inquiry or not – but it seems the ITA is currently accepting amnesty applications from Form 5329 recipients.
After negotiations at the local tax office, the deliverable is usually a written agreement which the taxpayer approves and then the upper echelons of the ITA approve.
Pros and Cons:
The main pros of the Israeli amnesty process, if successful, are no criminal prosecution and peace of mind. However, there is no free pass from paying the Israeli tax (after any applicable foreign tax credit) plus interest and indexation and perhaps fines for lateness.
However, the biggest problem usually is an ITA requirement to prove that the source of capital was taxed at the time or was not taxable in Israel. It can be very hard unearthing paperwork going back decades. The ITA taxes unproven capital at rates typically ranging from 10% to 50%.
Negotiations are done on a very professional level, consider sending a professional to the negotiations. Claim any foreign tax credits. Check very carefully which exchange rates to apply. Check loss utilization, the ITA does not allow losses to be used against any income outside the amnesty. Always check the position in all countries and for all family members….
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.