15 November 2018

The meaning of Voluntary Disclosure procedures

Worldwide Information Exchange reform

Bilateral information exchange between tax authorities and banks regarding black capital exposure and overseas revenue declaration have recently been accelerating and will continue to expand in the future. Governments are motivated to take this course not only to enlarge their budgets on a one-time basis but also to generate income for the future.

Israel is one country among many others already signed those OECD's international of reporting standards sharing-information agreements, this system supposed to ease the global process of tax enforcement worldwide. The individual's financial information collected by financial institutions and automatically submitted to the account owner’s country of residence on an annual basis.    

Which means that foreign banks that are managing accounts for Israeli residents are sharing information to the State of Israel regarding these accounts and it does apply to all the countries signed those agreements. If the authorities will find irregularities while crossing the information and the declaration of those individuals, they might find themselves standing against a criminal investigation. Voluntary disclosure offers last chance to avoid criminal charges.

Taxpayers in Israel: Since 2003, Israeli residents are obligated to report all income and assets in Israel and abroad under the personal tax obligation. These include bank accounts, financial inheritance, real estate, etc. The obligation to report applies to all Israeli residents, including individuals who have never filed an annual report in Israel.

Failures in reporting as obligated is a criminal tax offense.

Furthermore, under Israeli Tax Law, not only residents must pay income taxes on their global income, but also foreigners who are holding bank accounts or assets in Israel or enjoying revenues derived from business activity in Israel have to declare and pay taxes to the Israel Tax Authority.

The procedure: On December 12, 2017, the Israeli Tax Authority published a temporary order concerning requests for voluntary disclosure with an option for anonymous declaration route, which will remain in effect until the end of this year- December 31, 2018. The voluntary discloser will be available as open procedure till December 31, 2019. Afterward, there will be consecutions for not declaring on time.

Benefits of the Procedure

The Tax Authority wants taxpayers, licensed dealers, individuals and attorneys who have failed to comply with the requirement to report worldwide income to amend their tax reports and settle the resulting tax obligations. The Tax Authority (in collaboration with the State Attorney) is therefore willing to forego legal proceedings in exchange for voluntary compliance.

The Procedure Optional Routes in Israel

Criteria for voluntary disclosure include options for either open or anonymous submissions.  Also included is an abbreviated short route for unreported capital not exceeding 2 million NIS, and the resulting taxable income does not exceed 500,000 NIS.

Individuals may disclose their assets and pay tax on unreported income contingent on compliance with the limitations published by the Tax Authority. The taxpayer must establish that his non-compliance was non-willful and in good faith and must not be under a current examination or investigation by the Tax Authority. Other conditions are specified in the procedure.

Yaniv Angel, Tax Partner – Auren Israel

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