The Director of the Israeli Tax Authority (ITA), Mr Moshe Asher, presented his thoughts on Israeli tax administration on June 15.
This was at the annual conference of the Israeli branch of STEP, the Society of Trust and Estate Practitioners. Following are some of the highlights.
The ITA Director pointed out the Israeli black economy is thought to be big by international standards and alluded to OECD findings.
In fact, in June 2014, the OECD estimated the Israeli non-observed economy at 6.6% of GDP, not as good at Norway at 1% of GDP, but not as bad as Mexico (15.9% or Italy (17.5%). The main sectors to blame in Israel is construction (22.4% of the 6.6% of GDP).
These statistics are the rationale for a tax enforcement crackdown, according to the ITA Director.
Privacy is giving way to transparency.
Given the above data, the construction and real estate sector is receiving special attention from the ITA.
The Tax Director mentioned the ITA has caught a representative of one Swiss Bank and is “in negotiation” with a second Swiss bank.
Moreover, the Panama Papers has caused the ITA to start investigating 1,500 new cases.
Locally, the ITA has hired an external firm to help it locate the websites of new online traders, to see if any are unregistered with the ITA. The Israeli Police and the Israel Money Laundering and Terror Financing Prohibition Authority also provide information to the ITA.
Money changers are current undergoing intense scrutiny by the ITA. According to the ITA Director, Israel has around 600 money changers and some of them allegedly clear checks for businesses keen to avoid depositing them in the regular banking system. The regulatory supervision of money changers and for charitable loan institutions (Gamachim) is to be tightened up.
The banks already provide detailed information to the ITA, and the prescribed format is to be expanded.
What about FATCA and the OECD CRS?
Bank secrecy is now a thing of the past, even in Switzerland. The United States has enacted FATCA, the Foreign Account Tax Compliance Act, and FATCA intergovernmental agreements with many countries, including Israel.
Consequently, Israel is passing and implementing legislation, including Amendment 207 to the Income Tax Ordinance and testing a FATCA reporting system between the ITA and the IRS in the US. This reporting system should go live in September this year. This will report details of the accounts of US persons in Israel and Israeli residents in the USA.
Israel will also be joining a similar but not identical system of the OECD, known as the Common Reporting System (CRS) along with 101 other countries, at the last count.
To make it all legal quickly in one shot, Israel recently signed the OECD Multilateral Instrument and will ratify it shortly.
As for Israeli residents, including Olim, before the ITA hands over information to a foreign tax authority, they are to be given a 14 day period to voice objections.
Comment: It is not clear if this will apply to automatic information exchange by banks, or merely replies by the ITA to their tax counterparts abroad.
Tax fraud is being made a serious “predicate” offense for money laundering purposes, by amending Section 220 of the Income tax Ordinance, and similar sections in the VAT and Real Estate tax laws.
For income tax purposes this should apply to concealed income totaling NIS 1 million in one year or NIS 2.5 million over 4 years. For VAT purposes, this should apply to concealed amounts of NIS 170,000 in one year or NIS 480,000 over 4 years. For real estate tax purposes, this should apply to value concealed of NIS 1.5 million. Discussions about this are underway with professional bodies (the CPA Institute is keen to restrict this to ongoing serious deliberate cases only)
Other enforcement measures:
The ITA has sent out around 118,000 inquiries (Forms 5329) to people living in Israel that are not taxpayers. In particular, people with three or more homes in Israel are targeted, in case at least one home is generating taxable rental income. These inquiries have helped raise tax revenues of NIS 660 million according to the ITA Director. Consequently, another batch of 10,000 inquiries will be sent within the next month.
Comment: The inquiry forms are bar coded, suggesting that replies will be noted and non-replies will be chased.
Tax Amnesty Extension:
Given the ITA’s push to enforce, Israeli residents with a skeleton in their closet are encouraged to come clean voluntarily, before the ITA catches up with them.
The ITA has published a voluntary disclosure procedure (aka tax amnesty) that was due to expire shortly, on June 30. The ITA Director announced the procedure will now be extended by six months and available to those applying by December 31, 2016, if they are not currently under inquiry.
There are two main possibilities. First, an anonymous application is possible – the taxpayer’s identity is only disclosed (by his advisors) at the end if all goes well. Second, a fast track (non-anonymous) procedure is available for cases involving capital up to NIS 2 million and income up to NIS 0.5 million.
A written announcement is expected shortly from the ITA regarding the 6 month extension. Anyone with untaxed income is recommended to seek advice on the amnesty possibilities as soon as possible – preparing the applications takes time.
The ITA Director was asked about the ITA practice of imposing bank freezes (foreclosures) on taxpayers with tax files (people with businesses and investments).
The ITA Director claimed that three written warnings are first issued that the taxpayer needs to do something. This reply was met by disbelief, whereupon the ITA Director blamed the Israeli Post Office for any delays in delivering the warnings and claimed it only happens on isolated occasions.
Comment: Such warnings sometimes arrive long after the bank foreclosure, if at all. Additional taxpayer safeguards are needed and the banks should also warn clients.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd