Israel and the UK ally against tax evasion
The Israel Tax Authority and Her Majesty’s Revenue and Customs are using powerful technologies to close in on tax dodgers.
In Britain, the mix of politics, the upcoming elections, the budget deficit and public pressure has provoked a whirlwind of controversy around the issue of tax avoidance and tax evasion. This has forced countries across the world to look more closely at any offshore assets sheltered abroad.
The power of information
Information is power and access to information is becoming easier. Israel (famous for its advanced technology and innovation) uses new technology to its advantage to identify potential tax evaders. Israel Tax Authority chief Moshe Asher has confirmed that Israel is “harnessing technology and our database to reach taxpayers who haven’t been paying according to the law.” Effective data and information is crucial to successfully expose those with undeclared offshore income and gains.
The UK too uses an innovative computer system, CONNECT, which is said to hold more data than the British library. The system cost £45 million, and applies a formula to the data held to successfully identify suspect taxpayers. This strategic tool has secured over £3 billion in additional tax revenue by cross-matching and analysing a wealth of internal and third party data in relation to taxpayers and applying a unique fraud detection platform. This platform identifies previously hidden relationships between data, organisations and people.
With increased will from governments around the world coupled with the technology to easily share and analyse information, full information exchange, in the form of the Common Reporting Standard (“CRS”) is only a few years away. This is an internationally agreed way to implement the automatic exchange of financial account information between jurisdictions across the globe with the objective of making it more difficult for tax evaders to hide monies. The Israeli Ministry of Finance confirmed that Israel will adopt these procedures by the end of 2018. Information in relation to UK residents with accounts in Israel will be provided by Israel to HMRC and vice versa. George Osborne, Chancellor of the Exchequer, announced in the Budget on Tuesday that the UK government will invest £4 million in data analytics resources to maximise the yield from the CRS data. 93 jurisdictions have committed to the implementation of the CRS.
The Bank of Israel also recently implemented measures to prevent “black money” from lying in Israeli bank accounts and causing legal and reputational risks for the Israeli banks. It circulated a draft directive to the banks in Israel whereby all foreign account holders must sign a declaration confirming they pay the relevant tax in their home jurisdiction. Foreign account holders must also sign a waiver of confidentiality to allow the Israeli banks to pass information to and receive information from tax authorities abroad. For those who do not cooperate, the Israeli banks can freeze the accounts or restrict their banking services (including refusing to authorise withdrawals).
Building alliances
As part of this global movement against tax evasion the Israeli Tax Authority (“ITA”) welcomed a visit by the UK tax authorities (“HMRC”) in Tel Aviv towards the end of last year to discuss this subject. Tackling tax evasion is becoming an increasingly viable revenue stream for governments, and both the ITA and HMRC stressed their commitment to increased cooperation and confronting the issue of undeclared foreign assets.
The visit by HMRC was heralded a success, and resulted in a more open dialogue between HMRC and the ITA, with both parties making a clear statement of intent for the two jurisdictions to further build their relationship and move towards tax transparency. This is likely to cause concern for some UK and Israeli taxpayers with unresolved tax problems in both countries. It was evident that HMRC is interested in those with undeclared assets in Israel and the ITA is interested in those with undeclared assets in the UK.
The British Ambassador to Israel, H.E. Matthew Gould (CMG MBE), who attended the seminar, summarised the position well by stating “the visit of senior officers from the UK’s Revenue and Customs for talks with their Israeli counterparts will allow them to take this cooperation to the next level. The world is becoming smaller and it is getting harder and harder for tax evaders to hide”.
The original motive behind many members of the Jewish Community holding offshore assets is cultural and understandable. Many Jews fleeing the Holocaust deposited large amounts of money in offshore bank accounts (usually in Switzerland) and recovering the money caused numerous problems for survivors and victims’ heirs. Many families inherited a nest-egg in an offshore account which remains largely untouched and problematic for the family members who are unsure how to resolve the historical tax issues. Given the demise of Swiss banking secrecy, some of these monies have now ended up in Israel and other countries.
Voluntary disclosure
Both the UK and Israel increased their ability to identify taxpayers with undeclared offshore assets and increased their powers to strongly penalise these taxpayers. Nevertheless, for a limited period of time only, they are keen to promote voluntary disclosures. The ITA launched its renewed voluntary disclosure program on 7 September 2014 to encourage non-compliant taxpayers and HMRC strongly endorses voluntary disclosure, including the Liechtenstein Disclosure Facility (“LDF”) which continues to be the most attractive option for UK taxpayers to declare offshore assets. Under these disclosure programmes, taxpayers can disclose undeclared income and gains with immunity from prosecution and favourable terms. The Israeli voluntary disclosure programme closes in December 2016. A surprising announcement in the Budget on Tuesday was that “the government will toughen sanctions for those who continue to evade tax by closing the existing disclosure facilities for tax evaders early.” The LDF will therefore be closing in December 2015 instead of April 2016. HMRC and the ITA won’t need to offer beneficial terms or incentives for taxpayers to come forward to declare offshore assets as they will have the information they need to readily identify such taxpayers via automatic international exchange of information and of course their own technology.
A tougher ‘last chance’ disclosure facility will be offered in the UK between 2016 and mid-2017 (the start date for automatic information exchange) with penalties of at least 30% levied and with no guaranteed immunity from criminal prosecution.
So what does the future hold? Israel and the UK intend to maintain close links and cooperate further to achieve their goals to tackle offshore tax evasion. Automatic exchange of financial information stacks the odds of offshore accounts being identified in favour of HMRC and the ITA. Disclosing now therefore offers finality to these tax issues and in the current environment the value of certainty and security cannot be stressed enough. The world is changing perhaps it is time for attitudes to change too.
