The Israeli Tax Authority (ITA) announced a new voluntary disclosure program (VDP or amnesty) for applications filed by taxpayers between December 12, 2017 and the end of 2019. The new program replaces an earlier program that stopped accepting applications at the end of 2016.
The ITA reports that 7,549 applications were filed under the old program of which 4,620 were anonymous, 1,436 fast track and 1,493 regular. The old program uncovered around NIS 30 billion of capital – the resulting amount of tax was not mentioned – presumably because the ITA was not too fast in negotiating and collecting it.
The new program is similar but not identical to the old one. It represents a last chance for taxpayers to sort out any skeletons in the closet before Israel implements in 2018 the OECD’s Common Reporting Standard (CRS). This is an automated information exchange system which makes most banks in the world report foreign account holders and their accounts to most tax authorities in the world, including the ITA. The OECD system complements the US FATCA information exchange system.
What’s in the new VDP Program?
A taxpayer can disclose assets and income thereon, pay the resulting Israeli tax and avoid investigation and criminal proceedings, if certain conditions are met.
Not only income tax is covered by the new VDP but also VAT, land appreciation tax, purchase tax, customs and excise duties are covered, among others.
The disclosure must be complete and in good faith. The VDP is not for cases already under investigation by the ITA. The ITA “is entitled” to reject an application if it already has related information itself, or via another government department, the court system in Israel or abroad or the media. A closed box approach applies to losses – only losses reported in the amnesty may be offset against other income also in the amnesty period. Losses cannot be brought forward or carried forward outside the amnesty box. A taxpayer can apply once only for an amnesty, but if he has applied before, he must say so on the forms.
At the end, tax is due with interest, inflation adjustment and fines.
Anonymous VDP applications:
Anonymous applications are possible until the end of 2018 (not 2019). A professional representative signs the application form instead of the taxpayer and handles the case. The representative is supposed to sign a VDP agreement and reveal the taxpayer’s name within 180 days after filing the application, unless the ITA extends the period by 90 days. Comment: The old VDP had deadlines which were largely ignored by the ITA.
Fast track applications:
A fast track procedure is available for named (not anonymous) cases involving capital of up to NIS 2 million and income of up to NIS 0.5 million “in the year reported”. The ITA does not commit to a deadline (unlike the old VDP – 30 days), but once the ITA approves the application the taxpayer has 15 days to pay the tax.
Attention should also be paid to the new VDP forms. The require, among other things, upfront tax calculations, disclosure of capital on the application date, whether any VDP was previously requested, whether diamond dealings are involved, and a declaration the monies were not derived illegally. Relevant documents should be attached such as probate and statements showing balances and movements.
If a case is rejected:
This will typically be because it was already known to the ITA – perhaps due to the CRS or FATCA. Under the old amnesty, the ITA undertook not to use amnesty material in court. In the new amnesty, this is limited to good faith cases with full cooperation and disclosure of information and documents and prompt payment of all amounts due when requested by the ITA.
Fines may now be imposed. Under the old VDP, fines were generally not imposed. There is no mention of how much the fines will be.
The new circular still does not reveal ITA tactics, such as imposing tax of 10%-50% tax on unproven capital. For example, if you inherited money, is your inheritance expressly mentioned in the will/probate documents, and can you produce a bank statement showing that the same amount passed into your bank account? The OECD advises tax authorities to be pragmatic on cases of incomplete records and not go back more than 5 -10 years, but the ITA may go back decades.
The period under review is not mentioned in the new VDP instructions. Previously income derived in the last 10 years was taxed, as well as unproven capital.
The new VDP aims to cut out bad faith – e.g. applying for an amnesty when you already know you or your bank is under investigation. Anything submitted may now be used in court evidence against you in deemed bad faith cases.
The ITA want all the amnesty paperwork upfront, no more one-line applications. This helps them to keep to deadlines for finishing and collecting their tax.
In short, the new VDP is like an iceberg – much remains hidden below the surface.
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