Voluntary disclosure in Israel- it’s time to become compliant
January 8 2015
As of 2003, Israeli tax residents are subject to tax in Israel on their worldwide income, including passive income (i.e., interest, dividends and capital gains) generated in their offshore bank accounts. Although more than a decade has passed, many Israeli residents have still not reported on income earned by them in their offshore bank accounts, thus rendering them as tax offenders under applicable Israeli law. In actual fact, according to the Israeli tax authority’s (“the ITA”) estimations, billions of dollars held in offshore bank accounts owned by Israeli tax residents have not yet been disclosed to the ITA.
It is no secret that the ITA is becoming more and more aggressive in its pursuit of Israeli residents holding undeclared bank accounts overseas and, to this end, has strengthened its ties with both foreign governments and foreign tax authorities, in an endeavour to “catch” those residents. In this regard, Israel is expected to shortly sign the Multilateral-Convention on Mutual Administrative Assistance in Tax Matters and other exchange of information agreements, which will allow the ITA to demand and receive information in the tax sector from other signatory countries, which it was previously unable to attain. The “opening curtain” to this was the ratification of the tax treaty between Germany and Israel, pursuant to which the German government is required to provide, inter alia, information regarding German bank accounts that are held by Israeli residents. Once this information is received by the ITA, many Israeli tax residents who continue to be uncooperative vis-a-vis the ITA will find themselves subject to criminal proceedings in Israel.
Moreover, during the last few months, most of the well-known banks in Switzerland and Europe, have taken radical procedures in order to force their Israeli clients to become compliant in Israel with regard to their reporting duties to the ITA. In this regard, the foreign banks have asked their Israeli clients to provide them with written confirmation, signed by their tax attorney/accountant, stating that the details pertaining to their offshore accounts were properly reported to the ITA. Clients unable to provide such written confirmation were requested by the foreign banks to close their accounts and move their funds, by means of bank transfer (most of the foreign banks do not allow for the moneys to be withdrawn), to another bank account in their names. This request has nonetheless created difficulties in that, at present, most of the European banks will not accept new deposits from other banks unless written confirmation is received from the account holder stating that the source of the funds was duly reported to the tax authorities in the relevant country in which the account holder resides (i.e., the ITA in the case of Israeli residents). As a consequence, many Israeli residents holding undeclared bank accounts outside of Israel are not only confused by all this, but are also very anxious, particularly regarding their potential culpability vis-à-vis the ITA.
As noted above, the ITA is not taking any shortcuts in its pursuit of the undeclared bank accounts, including the recent publicized incident of the arrest of Mr. Ronny Elias, a UBS senior officer, and the disclosure of a list of the bank’s Israeli clients. The ITA has already arrested more than thirty Israeli residents whose names appeared on the said list. Allegedly, the Israeli tax authorities can now arrest additional taxpayers based on the information gleaned by them from that list.
In light of the above, many Israeli residents who hold undeclared bank accounts overseas are now being asked to “come clean” and to take the necessary steps required in order to enable them to become compliant with regard to their reporting requirements under Israeli law.
Under the new Voluntary Disclosure Procedure in effect in Israel, and which was introduced by the ITA on September 7, 2014 (“the Procedure”), Israeli residents wishing to declare their unreported offshore bank accounts are required to submit an application to the Senior Deputy Director General (Investigations and Intelligence) of the ITA, requesting that their application be accepted under the Procedure. Provided that such applications are not made subsequent to an ongoing tax investigation of the relevant applicants, the applications will usually be approved, with the applicants obtaining full immunity from criminal prosecution. However, such grant of immunity is conditional upon the settlement by the Israeli residents of the full Israeli tax liability owing on their offshore bank accounts, and applicants are required to approach the relevant income tax assessing officer, present the amounts of unreported income and pay the applicable taxes.
Our experience in representing clients who hold offshore accounts and who submitted applications under the Procedure, has shown that after engaging in professional and uncompromising negotiations with the income tax assessing officer, a tax agreement can be reached pursuant to which approximately 5%-13% of the unreported bank accounts’ current capital would constitute the tax liability. This is particularly true where the tax payer is unable to prove, by means of official documents, that the source of the funds is absolutely clean and clear. Although this tax payment cannot be avoided, there is no doubt that it would be preferable to pay it and attain certainty, rather than be hounded and exposed to criminal prosecution and civil fines. Upon conclusion of the Procedure, the taxpayer can continue to hold the funds offshore, use them has he wishes or repatriate them to Israel.
In addition, the ITA recently published a temporary order under the Procedure, pursuant to which taxpayers may approach the ITA on a “no name basis” and negotiate the scope of their tax liability, without having to provide their personal details in advance. Moreover, pursuant to the temporary order, taxpayers whose unreported income does not exceed NIS 500,000 and whose unreported capital does not exceed NIS 2,000,000 will be allowed to opt for an expedited type of assessment termed the “short route”. According to this route, taxpayers will be required to submit a self-assessment, demonstrating the amounts of unreported income and applicable tax liability payable and pay the tax directly, without the need for entering into negotiations with the income tax assessing officer with respect to the applicable tax to be paid. Upon payment of the relevant tax liability, such taxpayers will obtain immunity from criminal prosecution.
