November 29, 2015
Lately, we have received a few hysterical calls from people that have had their accounts frozen because they had not signed on some bank papers.
Most of these calls did not come from American citizens, but rather from citizens that have a European or Canadian passport. The bank document is detailed and is titled "Declaration of Residency and Waiver of Secrecy Rights." Apart from the regular information that you always need to provide to the bank such as your full name, address and Teudat Zehut, it also requests that you confirm any additional citizenships you may have and include your foreign passport number.
The document continues to request more information such as:
- Are you an "Oleh Hadash" and from which country;
- Do you have multiple citizenships and from which countries;
- Are you are considered a resident of an additional/other country for tax purposes; and
- Are you an American citizen/resident/have some sort of connection to the Unites States/born in the United States.
The document requests that you confirm that you report the Israeli account/s and pay any taxes according to any foreign law that applies to you due to your foreign connections to that country, or that you are participating in a voluntary disclosure program in order to become complaint with the tax laws of that country. In addition, you have to confirm that you waive all secrecy rights regarding the information in this document and agree to pass this information on to the Israel Tax Authority (“ITA”) which in turn might pass on the information to additional countries according to any bilateral agreements signed between them. The document also requests that you give the bank permission to submit all information connected to the account/s if asked to do so either by the Israeli tax authority or any authorized authority abroad.
This is much more information from what was previously needed in order to open a bank account in Israel. What is the reason for all this and how did this all get started?
This bank document and others similar to it, is most likely a development in response to the recent request from the Bank of Israel requiring banks to receive from their foreign clients a declaration that they have paid the required tax on the income in their Israeli bank accounts in their country of residence. The document takes this request one step further requiring the same information from its Israeli residents as well.
As the world becomes increasingly globalized, it is becoming easier for taxpayers to make, hold and manage investments through financial institutions worldwide. Vast amount of monies are kept offshore and are untaxed even within the taxpayer’s home jurisdiction. Offshore tax evasion is a serious problem for countries all over the world. Therefore, they have a shared interest in cooperating with each other against tax evasion. One way to fight tax evasion is through the exchange of information between countries.
Following is a short review of the latest developments Israel has gone through regarding offshore tax evasion and exchange of information between countries:
Israel’s Tax System
In 2003, influenced by a global trend to fight against hidden accounts and tax haven entities, Israel changed its method for collecting tax from its residents by using a system called "personal taxation". Israeli residents have to report all income from any asset or account regardless of its geographical source. Because of this change, and due to the fact that Israeli residents own foreign accounts that were now supposed to be reported and their income taxed, there have been numerous efforts from the ITA to detect tax evaders and to expose any previously undisclosed and unreported accounts or assets that Israeli residents might have abroad. One of the ways to do so is through the Israeli voluntary disclosure program. The objective of the program is to encourage non compliant tax payers to come forward, disclosure their unreported income and pay taxes, thus avoiding criminal prosecution.
The first program started in 2005 and since then there were various changes made to it. The most recent program started on September 7, 2014.
According to this program, which expires on December 31, 2016, the taxpayer can disclose the unreported income, and pay the taxes due, if all the conditions of the program are met, which include coming forward before the ITA has started conducting an investigation or questioning the tax issues of the applicant.
Taxpayers who are accepted into the program will still have to pay all taxes due, including a penalty on the capital as of December 31, 2004 which can range between 10-20%, but in return the ITA, with the approval of the Criminal State Attorney, will not recommend criminal prosecution against them.
There are also two temporary provisions which expire on June 30, 2016: an Anonymous Track and a Fast Track.
Israel and FATCA reporting
On June 30th, 2014, Israel signed on an inter-governmental agreement with the United States to implement FATCA provisions. This means that the Israeli financial institutions will have to report to the United States government all their clients who are US citizens and/or Green card holders disclosing all these accounts. This has huge implications for any American, that owns an account in Israel, and that has never reported his foreign accounts or paid taxes on its income to the IRS, and to some States if applicable.
The first deadline for filing FATCA information reports with the IRS by Israeli foreign financial institutions will be September 30, 2016. According to the agreement signed between the two countries, the United States is also supposed to transfer information regarding Israeli citizens who possess financial accounts in the United States, although the timeframe for such a transfer is yet to be decided.
Israel and CRS
Israel declared on October 27th, 2014, its intention to join the OECD's common reporting standard (CRS) by the end of 2018, as part of Israel’s commitment to meet international standards regarding tax enforcement. Once the CRS is implemented, financial institutions will have to identify and file information concerning non-Israeli resident account holders, which includes balances, deposits and income received in bank accounts. The Knesset approved recently the necessary legal framework of exchange of information between Jurisdictions that Israel has a Tax Treaty with or agreement for such an exchange, and Israel signed on the Multilateral Competent Authority Agreement on November 25, 2015, thus becoming the 91st jurisdiction to join the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
More than a hundred jurisdictions have already agreed on implementing this global standard for the automatic exchange of information between tax authorities. Included among these are many countries which have citizens living in Israel such as the U.S., the UK, Switzerland, Belgium, Canada, Chile, Mexico, Argentina, South Africa and France. As a result of this agreement, banking information will now flow from and to these countries.
Conclusion
As can be seen, from the above analysis, Israel is working hard to ensure that it keeps up with the worldwide trend of battling against tax evasion. Therefore, it is just a matter of time before secret accounts will be a concept of the past. If you still own an unreported account either inside or out of Israel, we highly recommend that you come forward and disclose it to the relevant tax authorities, before it is too late.
The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances
Mirit Reif, an Israeli tax attorney, is a senior associate at Dave Wolf & Co. Law Firm. . She can be reached at 02-622-2335.
Dave Wolf & Co. is a law firm specializing in taxation and wealth management with offices in Jerusalem, Tel-Aviv and New York and affiliate offices in Greater China, London and Amsterdam.