Tax Alert No. 29 - 

International taxation  28.3.2018

A new procedure for voluntary disclosure – probably the last chance - 28.3.2018

On and off and in various incarnations since 2005, taxpayers have been able to come forward to the Israel Tax Authority to settle and disclose data on hidden income and assets not previously reported as required by law. This arrangement granted taxpayers a “clean bill of health” in the form of immunity from criminal proceedings against them.

The most recent voluntary disclosure procedure (VDP) expired at the end of 2016. After talks with the State Attorney office, a new VDP was published in December 2017 – as a two-year (2018-2019) temporary order, or, for anonymous submissions – for one year (2018) only. This temporary order is intended to provide citizens with a last opportunity to come forward about their income and assets, before all agreements for information exchange based on the European (CRS) and American (FATCA) initiatives are implemented in practice. Based on these agreements, information and data on income and assets held abroad by Israelis is already being delivered from the United States, and in short order from many other countries. The VDP applies to any form of unreported income and assets, not only those held abroad.

Conditions of the procedure are the same as in the past, namely – that the application to the Tax Authority must be submitted honestly, completely and in good faith, and that the Authority does not hold prior knowledge and/or that there is no inquiry or investigation of the applicant and their immediate circle by the Authority. The greatest advantage of the VDP is the ability to submit the application to the Authority anonymously; only after the expected tax liability for the specific case is clarified with the income tax assessing office must the taxpayer’s identity and details be specified. Keep in mind that the anonymous submission track of this temporary order is for one year only – that is, until December 31, 2018, and a draft agreement must be reached within 180 days (which may be extended by an additional 90 days). The procedure also includes a shortened track for smaller amounts in which the total capital to be settled does not exceed 2 million NIS (about 570,000 US dollars) and the taxable income derived from this capital does not exceed 0.5 million NIS (about 140,000 US dollars).

Note: Immunity from criminal indictment is not granted to anyone whose income derives from illegal activity, and the Tax Authority will not grant immunity to anyone whose application is not submitted completely and in good faith, or that does not pay the agreed-upon taxes. A taxpayer who has benefited from the VDP in the past is not eligible to do so again. We recommend not to leave matters unresolved.
In addition to the above and to the procedure announcement, the Tax Authority has published detailed instructions for carrying out the procedure. It seems to us that the Tax Authority has retracted from its original intent to encourage Israelis with unreported income and capital to carry out the VDP and pay owed taxes thereby avoiding criminal proceedings. After reviewing the instructions, we have found that these make execution of the VDP much more difficult to carry out. Below is a brief description of some of the instructions that may pose problems for our clients and their representatives:

  • Recommendation that representatives sign a declaration on client assets and income – for first time the VDP has requested that the client representative sign a detailed declaration, “in order to shorten and streamline the handling of the request… and to spare some of the inquiries to be carried out by the tax inspector.” For the sake of “sparing inquiries by the tax inspector”, an onerous burden of responsibility is being placed on the shoulders of the representatives; any erroneous or deceptive information submitted by the client may result in the Tax Authority placing the responsibility for the given declaration on the representative. The public outcry and objections brought to the Tax Authority by the professional community has resulted in the elimination of this injunction.

  •  Requirement to submit “all information and supporting documents” with the VDP application – the procedure requires submission of “all information and supporting documents, with emphasis on the source of the principal and date of production…”. Of course submission of “all” data and supporting documents is impossible – the disclosure may span dozens of years and two or three generations, during the course of which no paper trail of the capital may be available, and the origin of the principal may be unknown.

     Imposition of a monetary sanction for lateness in report submission and deficiency fine – throughout the talks on voluntary disclosure, the matter of fines barely came up, and only did when the tax inspector was using aggressive bargaining tactics. The new procedure includes fines as a realistic (although not required) option, with the qualification whereby a deficiency fine will not be imposed together with the monetary sanction, along with a list of guidelines for leniency – we hereby would like to “thank” the Authority for the good grace of not imposing “double fines”.

  •  No tax will be imposed on the principal if its source was not taxable – the procedure stipulates that in the event that the tax assessor is convinced that the source of the capital is not taxable, no tax will be imposed on the principal. It also states, for example, that “bequests or gifts” are not taxable. Note that this is the law in effect today, and despite what is stated, the principal is still partially taxed. Time will tell whether this provision will ultimately be implemented by the income tax assessing offices.

    In recent years, our office has been helping many clients – individuals, companies and trusts – to settle the affairs of their income and assets with a professional staff comprising former Tax Authority key-employees who in their previous positions also handled these very requests. We will be happy to provide assistance with any question that may arise.

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