During the last months of 2016, and as part of the FATCA agreement between Israel and the United States, the Israel Tax Authority (ITA) transferred to the United States Internal Revenue Service (IRS) data relating to Israeli financial accounts owned by American citizens, during 2014 and 2015. In exchange, the ITA received information of over 35,000 accounts owned by Israeli residents that are held in financial institutions in the United States.
Under FATCA, (the Foreign Account Tax Compliance Act) that was enacted in 2010, non-U.S. foreign financial institutions (banks, hedge funds, pension funds, insurance companies, etc.) are required to report to the IRS information regarding accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold substantial ownership interest, i.e., 10%. Failure to do so will result in a U.S. withholding tax of 30% on most U.S.-sourced income payments to the foreign financial institution.
On June 30, 2014 the Governments of Israel and the United States (the “Competent Authorities”) signed an agreement to improve international enforcement of taxes and for implementing provisions of the Foreign Accounts Tax Compliance Act (FATCA).
In order to implement the FATCA agreement, the Competent Authorities signed on March 23, 2016, the Competent Authority Agreement (the “CAA”), that requires the Competent Authorities (the ITA and the IRS) to enter into an arrangement in order to establish the rules and procedures necessary in order to implement the FATCA agreement.
The first list of information has now been exchanged between the two countries, and this will be implemented on a yearly basis.
Since January 1, 2003, Israel has changed its method for collecting tax from its residents by using a system called "personal taxation". Israeli resident has to report all income from any asset or account regardless of its geographical source. The information now received from the United States will be investigated and compared with the information the ITA already has in its possession from Israeli residents that have been reporting their foreign income, and from those who have, or are still, participating in the Israeli voluntary disclosure programs.
The procedure of receiving financial information relating to Israeli residents that own accounts outside of Israel through FATCA, is part of the increasing efforts of the ITA to expose unreported worldwide income of Israeli tax residents including through other countries via the Common Reporting Standard.
The Common Reporting Standard, otherwise known as the CRS, is the global standard for automatic exchange of financial information as developed and initiated by the OECD. Israel signed on the Multilateral Competent Authority Agreement on November 25, 2015, as part of Israel’s commitment to meet international standards regarding tax enforcement. During May 2016, the ITA signed on the Competent Authority Agreement in order to establish the rules and procedures necessary in order to implement the CRS agreement. According to this agreement, Israel is anticipated to begin to transfer 2017 end-year financial information with various countries by September 2018.
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