22.07.2010

Much-vaunted Swiss secrecy reduced; Will Israel tango?

As discussed in an earlier article, one of the hottest topics on my desk is whether to go for a tax amnesty.

The much-vaunted secrecy of Switzerland and Liechtenstein has been reduced in the last year or so.

The United States has forced Switzerland to agree to cooperate with information requests pursuant to the US-Swiss tax treaty, and the Swiss Parliament has just ratified that agreement. France, Germany, the UK and others have reportedly acquired banks‘ customer lists.

Each of these countries have tax treaties with many other countries, including Israel. These agreements authorize tax authorities to communicate with each other. So, if this concerns you, should you knock on their door before they knock on yours? And what will it cost you?

Will Israel tango?

Israel has tax treaties with 50 countries including the US, the UK, Canada and most European countries.
Moreover, Israel is a member of the OECD and is on the tax ‘‘white list‘‘ of the OECD. Most of Israel‘s tax treaties contain an article similar to Article 26 of the OECD‘s model tax treaty, which says: ‘‘The competent authorities shall exchange such information as is foreseeably relevant for carrying out the provisions of this convention or to the administration or enforcement of the domestic laws concerning taxes of every kind.‘‘

There are two questions to consider: (1) Will the Israel Tax Authority (ITA) hand over information upon request to the tax authority of another country it has a tax treaty with? (2) What happens when another country lets the ITA have information about an Israeli taxpayer?

Will Israel hand over information?

When a tax treaty is given effect, the obligation of confidentiality in the tax law will not prevent an authorized official of the state from disclosing any information that it must disclose according to the treaty (Income Tax Ordinance, Section 197).
The ITA has issued a circular (17/2003) regarding the exchange of information between treaty countries. The circular points out there are a number of ways information may be exchanged: upon request, automatically, spontaneously, simultaneous tax audit and by way of economic sector statistics.

The last is the least problematic; in other cases, the circular states that exchanged information must remain confidential unless it is filed with a court.

The circular points out that treaties generally contain the following exceptions to the need to exchange information: (1) if the case involves administrative measures at variance with the laws and administrative practice of one country; (2) information that is not obtainable under the laws or in the normal course of the administration of either country; (3) information that would disclose any trade, business, industrial, commercial or professional secret or trade process; or (4) information that if disclosed would be contrary to public policy.

The circular identifies additional cases where no tax information exchange is necessary: (5) internal procedures of the other country not exhausted; (6) no tax at stake; (7) not material; (8) anti-money-laundering information requested from the ITA; (9) ‘‘fishing expedition‘‘ that does not specify which taxpayers are under suspicion; (10) lack of reciprocity; (11) irrelevant information sought.

Will other countries hand over information to the ITA?

If an Israeli taxpayer wants to come forward to head off a possible future inquiry, the ITA has ‘‘voluntary disclosure‘‘ procedures that must be treated with extreme care. The days of cutting quick, generous deals with the ITA have long passed, due to a series of well-publicized scandals. Don‘t let unscrupulous tax advisors kid you otherwise.
In our experience, thorough preparation is needed. Factors that will be taken into account include: (1) Did an Israeli resident taxpayer under-declare the original capital amount, or was it received as an inheritance or gift from a non-Israeli resident? (2) Does the taxpayer have an Israeli tax file? (3) What was declared on any capital declaration (hatsaharat hon)? (4) How long has this gone on for? (5) Any exemption applicable for new or senior returning residents?

What about an amnesty?
The ITA is inclined to initiate a one-time partial amnesty during 2010, but no general amnesty (not defined), ITA Director Yehuda Nasardishi said at a conference of the Israeli Institute of Certified Public Accountants in January.

The aim is to encourage tax offenders to repatriate currency back to Israel. Consideration is being given to granting amnesty applicants immunity from criminal prosecution. They would still have to pay the tax due, but interest and indexation of unpaid tax might be reduced, he said.

It remains to be seen if and when such an amnesty will be introduced in Israel. No further details of the proposals have yet been announced, but it is understood that they are still being formulated.

In 2009, there was a different kind of amnesty in Israel for irrevocable trusts regarding the tax years 2003-05. The catch was that in many such cases, no Israeli tax was actually due in those years – but the amnesty tax may help reduce capital-gains tax in 2006 onward in some cases! The amnesty currently proposed would be a step forward in ITA thinking. Until now, many within the ITA thought it wrong to give any tax reduction or ‘‘prize‘‘ to tax evaders. This would only encourage others to do the same and wait for their ‘‘prize.‘‘

But merely reducing the penalties may be a compromise solution that may, hopefully, bring money back into the economy and taxpayers back into the tax net, without sacrificing principles.

Our advice is not to wait for any such amnesty; there is no certainty it will emerge and be workable.

A no-name approach to the ITA may be a safer alternative.

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

leon@hconsulting.com

Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.