The Israeli Tax Authority (ITA) published on May 22 a backdated Circular on the implementation of Israel’s FATCA Agreement with the United States of America (Circular 3/2017 dated February 12, 2017).
What is FATCA all about?
Briefly, the US Congress enacted the Foreign Account Tax Compliance Act (FATCA) in 2010 requiring non-US account information from US taxpayers. Israel and the US signed an intergovernmental FATCA agreement on June 30, 2014 requiring Israeli financial institutions to locate and report accounts of US persons to the ITA to pass on to the IRS in the US. The rules are comprehensive and run to hundreds of pages. The implementation of this process is now starting in Israel, and began last year in the US.
Who is covered?
FATCA applies to US persons, but unfortunately, the ITA Circular refers to them as US residents (Toshav Artsot HaBrit) even if they are resident in Israel. This is sure to cause confusion. The Circular does say that this refers to: an individual who is a US citizen or resident; an entity or partnership formed in the US; a trust in which a US court can take judicial decisions regarding their management; a trust in which a US resident has authority to control material decisions; or an estate of a US citizen or resident. Certain bodies are not treated as US persons, including those wholly owned by the US government.
Certain financial institutions are also excluded from FATCA reporting, including Israeli government entities, international bodies, the Bank of Israel, certain pension funds, and others.
Financial institutions in Israel are required to conduct due diligence to identify account holders with US indicia in one or more of the following ways: electronic, self declarations, publicly available information about companies. The US indicia include: US citizen or resident ID, US birth place, US postal address or current residential address, current US telephone number, standing order on a US account, power of attorney or signatory rights held by a party with a US address, care of or hold mail sole address.
These indicia may be found in, among other things, the following documents: passport or identity documents, account opening forms, anti money laundering or other regulatory documentation, power of attorney or signatory documentation, standing order forms, partnership agreements, incorporation documents, company bylaws, trust agreements.
These indicia tests must be applied to the control holders of a passive non-financial foreign (non-US) entity (“Passive NFFE”).
Due diligence is not needed for accounts below the equivalent of $50,000. Special transitional rules applied to existing accounts as of June 30, 2014 – less due diligence was needed for accounts below the equivalent of $1 million. But certain accounts over $1 million as of December 31 must be re-checked by June 30 of each following year.
The Circular clarifies that if no US indicia are found and so long as the circumstances don’t change, there is no need for the financial institution to report the account to the ITA.
If an Israeli financial institution finds US an account appears to be reportable to the ITA (to pass on to the IRS), it must first inform the account holder (or controlling shareholder of a non-financial entity) 30 days in advance, and every two years, to the current postal address or email address
This notice is required by an Israeli High Court (Bagatz) judgement in the case of Republicans Overseas Israel vs. the Israeli government (case 8886/15). If the account holder claims to be a non-US Person, the financial institution cannot transfer information to the ITA until the matter is discussed and an answer is given, even after the 30 day notice period has elapsed.
Which Accounts Are Not Reportable?
To disprove US indicia, an account holder would need to produce documentation.
With regard to a US birthplace, all the following documents would be needed: IRS form W8, non-US passport and a copy of a confirmation of waiver of US citizenship or a plausible reason one doesn’t exist.
With regard to other indicia: A US Form W8 and/or various other identification documents listed in the FATCA intergovernmental agreement.
The ITA Circular confines itself to finding US persons with financial accounts in Israel. A few things appear to be missing.
First, what about Israeli residents who relocated to the US and then returned to live in Israel without becoming US citizens or green card holders.
Second, what about Israeli residents with financial accounts in the US – how will the ITA tax them? The head of the ITA, Mr Moshe Asher recently explained that a new ITA computer-based unit has been set to process names of many thousands of Israelis received from the IRS.
Third, what about the OECD Common Reporting System (CRS)? This is a separate but similar system to FATCA involving around 100 countries other than the United States. Israel has signed up to the CRS and will start implementing it in 2018 regarding accounts in existence in 2017.
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