Anyone applying for tax amnesty in 2019 will be at a disadvantage as the ITA will want to know their identity from the beginning.
Since 2011 the ITA has operated successive rounds of voluntary disclosure procedure (VDP) also known as tax amnesty.
The 2018 program is stricter than earlier ones. 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 automatic 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.
Three alternative routes:
First, there is the regular VDP route, available until the end of 2019. Second, there is the fast track route, also available until the end of 2019, if capital is under NIS 2 million and income under NIS 0.5 million. Third, and most popular, is the anonymous route available for applications filed by the end of 2018. The identities need only be revealed if and when the tax and terms are successfully concluded.
Points to note:
The period of years to be covered by the VDO is not stated in the instructions. In practice, the ITA usually wants to collect tax on income over the last ten years.
The ITA also taxes capital at the beginning of the ten-year period unless clear proof exits that such capital was already taxed or was exempt from tax. Clear proof usually means documents and bank statements. Unproven capital is typically taxed by the ITA at rates ranging from 5% to 50% (usually 10% – 15%), although this is not stated in the published rules. Taxpayers often plead “they need to understand it was years ago”. The ITA replies “We understand but we are not convinced”. So prepare your paper trail before applying for a VDP. Time is of the essence.
All relevant records must now be filed upfront electronically with the amnesty application. It is fair to assume the ITA will want to discuss the implications of any missing records. The 2018 rules required all income and capital to be audited, but the ITA has apparently backed down from this requirement.
At the end of the negotiations a partial assessment is issued covering just the VDP, not other income. On the regular route, the local tax office and the taxpayer sign an agreement.
On the anonymous route, at the end of the negotiations, a draft VDP agreement is signed which reveals the taxpayer’s identity. The local tax office sends it to the Income Tax Commission (head office) to check if the case is already under investigation. If no investigation is under way, the Commission may write saying that no criminal proceedings will be taken and ask for payment of the tax within 30 – 45 days.
If an investigation is already under way, immunity from criminal prosecution is not granted – but material filed with the ITA may not be used in court in good faith cases involving full taxpayer cooperation and prompt payment of all amounts due when requested by the ITA,
The 2018 rules allow 90 -180 days for processing VDP applications on the regular route, 180-270 days on the anonymous route and 15 days to pay the tax if no questions arise on the fast track route. In practice, similar time limits were not exactly observed in the past.
The 2018 rules allow the ITA to impose “deficiency fines” of 15% of the VDP tax, or even 30% in extreme cases (e.g. artificial or fictitious arrangement), but leniency is possible in certain cases including immateriality,
These amnesty rules are controversial and raise many issues. Basically, in order to avoid criminal prosecution, the ITA drives a hard bargain. An anonymous application is typically advisable to improve the negotiating hand of the taxpayer. If the ITA disagrees about something and knows the taxpayer’s name, the sky is the limit….
To Sum Up:
The banks are making it hard to move money in and out of Israel. An anonymous amnesty application can help avoid those problems. Please contact us for more details.
As always, consult experienced tax advisors in each country at an early stage in specific cases.