New Voluntary Disclosure Procedure Merits Consideration

New Voluntary Disclosure Procedure Merits Consideration

21.11.2011

Introduction:

The Israeli Tax Authority (ITA) launched a new temporary voluntary disclosure procedure (hereinafter ‘‘temporary VDP‘‘) on November 15, 2011. Israeli residents have until June 30, 2012 to report previously undisclosed income on foreign (non-Israeli) assets. This action will confer immunity from criminal proceedings, and some relief regarding fines, interest and indexation.

This represents an improvement over the older fixed Israeli VDP dating back to April 10, 2005 which will partly apply until June 30, 2012 and will fully apply again after that date.

The temporary VDP does not apply to assets held in Israel or to foreign (non-Israeli) residents. The Following is an overview of the temporary VDP Circular of the ITA.

Background:

The ITA has stepped up its efforts to uncover unreported property and cash held abroad by Israelis and more is promised in the near future. This follows ‘‘signs of a slight stirring in bank secrecy observed in certain countries‘‘ (presumably Switzerland, Lichtenstein, and other offshore centers which have tax information exchange agreements).

Criteria for the temporary procedure:

According to the ITA, following is a non-exhaustive list of examples of cases where the temporary VDP will apply:

  Unreported income from foreign assets received by way of inheritance or gift from a foreign resident;

  Unreported income from foreign assets acquired with money derived from income generated in Israel or abroad on which tax was paid or no tax was due in Israel;

  Unreported income from foreign assets on which the liability to tax arose since the 2003 tax year, following the Israeli tax reform of 2003 (which made Israeli residents taxable on worldwide income instead of Israeli source income).

When does the temporary procedure not apply:
The temporary procedure does not apply to assets and income derived from:

  A ‘‘crime‘‘ under the Penal Law (defined in Section 24 as an offense carrying a punishment of more than three years);

  Applications made following or in parallel to an investigation or examination by a State authority, according to the older fixed VDP.

How does the temporary procedure work?

Applications to apply the temporary VDP will be reviewed by a panel led by the ITA legal advisor, together with the ITA deputy director for investigations and intelligence, the deputy director for professional matters, the deputy general for audit.

Applications to apply the temporary VDP shall include the relevant facts and be filed at the office of the director of the Tax Authority under the heading ‘‘Application for Relief According to the Temporary Voluntary Disclosure Procedure‘‘

Applications will undergo a preliminary review to see if they meet the above criteria and deserve to be discussed by the panel.

Applications not meeting the above criteria will not be dealt with by the panel. Nevertheless, according to the ITA Circular, ‘‘no use will be made in the criminal and civil arena with the information included in the application‘‘.

Applications meeting the above criteria will be confirmed by the panel and the applicant will thereby be given immunity from criminal sanction under the tax laws within the authority of the Tax Authority, subject to the conditions of the fixed voluntary disclosure procedure.

In addition, the panel will consider the tax consequences relating to the application and will prescribe a civil tax assessment, which may be by means of agreement with the applicant.

Outcome of an Assessment by the Panel:

The tax according to the assessment will not bear interest or fines. In additional, the panel may grant relief regarding indexation (for inflation) of the tax, and may even cancel the indexation.

Is this a revolutionary change?

Under the old fixed VDP procedure, the local tax office takes the place of the panel and there is no relief from interest, indexation and penalties. There is immunity if the applicant is not under investigation under both procedures. So it seems the temporary procedure mainly eliminates interest and penalties, which can be material if tax is paid years late.

Comments:

 It is unclear whether anonymous applications can be initially filed.

 Presumably, as this will be a civil procedure, the panel‘s conclusions will not be published

 If so, will there be safeguards to ensure transparency? This is important as the list of criteria are ‘‘non-exhaustive‘‘ meaning the panel apparently has discretion about accepting cases.

 Difficulty may arise in cases involving unreported income used to buy assets in Israel rather than abroad.

 If a case does not meet the criteria because an investigation or an examination is under way, will the ITA become precluded from using information included in the VDP application? It appears so…

Restricting the temporary VDP to Israeli resident applicants will cause problems, in particular for foreign trustees of trusts that are taxable in Israel, e.g. if the settlor is/was an Israeli resident. The new Israeli tax regime of 2006 deems the trustee to be ‘‘assessable and chargeable to tax‘‘ unless the trustee and the settlor or beneficiary(ies) agree otherwise. Is the above discriminatory under Israel‘s tax treaties with 50 other countries? It could be under the Israel‘s tax treaties with the US and Canada, but most other tax treaties don‘t yet address trusts, resulting in uncertainty. Specialist Israeli advice should be obtained in all trust cases.

Unreported income from foreign assets received by way of inheritance or gift from an Israeli resident are not covered by the temporary VDP. So the heirs of a recalcitrant Israeli resident taxpayer will be barred from using the temporary VDP.

 If tax was paid abroad on the foreign income concerned, this can, in principle, be credited against the Israeli tax due. This means lack of past disclosure may sometimes be remedied under the temporary VDP with little tax damage.

 US citizens or green card holders living in Israel have a harder time – they can only claim a foreign tax credit for US federal and state (not city) taxes paid on US source income, not on European source income, for example.

To sum up:

The temporary VDP is generally worth considering in applicable cases if an Israeli resident has a tax skeleton in the closet. The procedure not only offers immunity from criminal sanctions, but also immunity from interest and penalties. Any such application should be made by June 30, 2012 after checking things out.

As always, consult experienced tax advisors in each country at an early stage in specific cases.
[email protected]

Join Our Newsletter

Your name Email address: