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Voluntary disclosure in Israel Featured

Using the opportunity wisely

By: Attny.and CPA Eitan Asnafy

It is now unavoidable, the world trend the first signs of which started being felt a decade ago, as part of the OECD and G20’s fight to stop the “race to the bottom” and the battle against tax havens, has now reached boiling point.

The world of international taxation is at the start of a new era, exchange of information and removal of bank confidentiality. Already today the tax authorities (including the Israeli Tax Authority) are acting vigorously to create an infrastructure for exchanging information between them. The day is not far off where every taxpayer in the world will carry an international identity number, via which the tax authorities in many countries around the world will be able to obtain full information of his world assets and income. The world is becoming transparent.

This is the background to the voluntary disclosure procedure, which is a one-time opportunity for taxpayers who own unreported assets or income. These include not only businessmen but also salaried employees who have never had any contact with the authorities.

A new voluntary disclosure procedure was recently released (7.9.2014) in Israel (replacing the previous procedure from 2005). According to the procedure, the tax authorities are interested in encouraging taxpayers who are in contravention of the tax laws to correct their reports and report true data. For this purpose, the Israeli Tax Authority, in coordination with the State Attorney, is prepared to undertake not to initiate criminal proceedings (as long as the source of the income is not from illegitimate activity) against anyone carrying out voluntary disclosure under the conditions set forth in the procedure. This procedure has also been recently released in English.

Concurrently with releasing the procedure, the Israeli Tax Authority released a temporary order enabling the submission of anonymous or short track requests, for a period of one year from the release date, that is, until 7.9.2015.

The principle conditions for granting criminal immunity within the framework of the procedure are:

1. Honest and full application made in good faith;

2. At the date of the application, no investigations or checks are in progress (not by the Tax Authority and not by the police), and the Tax Authority does not have information relating to voluntary disclosure, regarding the taxpayer, his spouse or companies controlled by him/her.

The Tax Authority is permitted not to approve the application, if information exist relating to it regarding the taxpayer or his/her spouse or companies controlled by them, from any other governmental authority, in the media, or in court documents in Israel or overseas.

The application (which is to be submitted by e-mail to the Senior Intelligence and Investigations Manager at the Tax Authority) will include all of the information and documents relevant to the application. These will include, inter alia, the relevant tax years, source of income, details of income that has been omitted and an estimate of the tax payable.

Whilst the procedure is something to be welcomed, entering into a process with such significant implications needs to be done with extra care, after consultation with an attorney who is a specialist in the area of international taxation. The published information (at the press of a button) on the net cannot be relied upon, it being in some cases inaccurate and sometime totally incorrect. It can be compared to a person trying to remove an eye cataract by himself, using a YouTube film for guidance.

The vague formulation of the instruction as published, and the lack of a clear response on the part of the Tax Authority, create lack of clarity on certain issues involved in the voluntary disclosure process (for example: the question of the relationship between Form 5329 and/or its submission and the ability to employ the voluntary disclosure process; the question of the effectiveness of the anonymity protection; the question of taxation of the “principle”; the question of the lack of ability of the Authority to use the revealed information in the case of the application being refused; question of the validity of the published instructions vis-à-vis the provisions of the law itself, and so on).

Furthermore, prior to carrying out the voluntary disclosure process, it is essential to clarify, with an attorney who is a specialist with international taxation, whether the taxpayer indeed committed a tax offence of non-reporting or non-payment of tax. In no few instances, taxpayers have come to our firm after having been recommended to carry out the voluntary disclosure process, even though according to the tax laws in Israel (and inter alia in view of the tax treaties), they are not required to report or pay tax.

In appropriate cases, obtaining a legal opinion from an attorney who specializes in international taxation, will create an effective defense from criminal proceedings, and will save the taxpayer having to deal directly (and needlessly) with the Tax Authority in the voluntary disclosure process.

Thus, for example, a taxpayer who immigrated into Israel prior to 2007 could still be entitled to the benefits given to new immigrants and to returning residents starting in January 2007 and going forward (including a benefit in the form of an exemption from reporting and tax liability for 10 years from the date of becoming and Israel resident for tax purposes). A deeper and better quality examination of his location of center of life, based amongst other things on recent developments in legal rulings on the subject, could show that his center of life was moved to Israel only after January 2007, and not immediately on arriving in Israel.

At these critical decision junctures, an attorney who is a specialist in international taxation is clearly preferable to an accountant. The attorney is an expert in the legal system in Israel, including the rules of interpretation of the law and as to the binding normative structure. Working in the “legal gray area” is what the attorney does best.

Consulting with an attorney is preferable also in view of attorney-client confidentiality (confidentiality which does not exist between an accountant and his client). In the nature of things, this confidentiality is of great importance in processes such as voluntary disclosure.

On the other hand, the applications need to include, as previously mentioned, an estimation of the tax payable. This estimation is based on the preparation of precise calculations (usually, by a certified public accountant), and it would thus be desirable for the consultant to have the knowledge necessary for preparing these calculations.

Eitan Asnafy Law Firm has vast experience in the area of international taxation and in filing voluntary disclosure applications.

Attny. (CPA) Eitan Asnafy is one of the leading experts in Israel in the area of international taxation. He is a co-author of the leading treatise in this area (“International Taxation – The Law In Israel”), containing approximately 1,500 pages of in-depth legal analysis of all of the provisions of international taxation law in Israel.

The treatise serves as a prominent textbook in various universities, is frequently cited in Israeli cases on international law, and forms an infrastructure for development of the field in Israel.

You can contact us at:
International Tax Lawyer - Mr. Eitan Asnafy
This email address is being protected from spambots. You need JavaScript enabled to view it. or 054-4318-300
Last modified onSaturday, 12 March 2016 15:32

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