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Exchange of Information, Money Laundering and Voluntary Disclosure
August 2016


Exchange of Information between Countries


In recent years, there has been a trend of international cooperation in the battle against tax evasion. Countries are taking action to reveal their residents' funds, held outside of the country of residency.


USA


FATCA - Foreign Account Tax Compliance Act


In force as of 1 July 2014
The law was passed in order to prevent U.S. residents from evading tax in the U.S. by managing investments from outside of the U.S. Based on the law, non-American financial entities must provide the U.S. tax authorities with information on accounts held by Americans. In order to "compel" such cooperation, the law stated that the U.S. may withhold 30% of any American derived revenue transferred to financial entities that do not act upon FATCA.


Israel has signed a bilateral agreement on the implementation of FATCA by which the Israel Tax Authority will receive information on accounts managed by Americans in financial institutions in Israel and will submit them to the U.S. Tax Authorities. The agreement is bilateral, i.e. Israel can also obtain information about accounts held by Israelis in the U.S.
The transfer of information is subject to deadlines, the first of which is expected on 30 September 2016.


Amendment 227 of the Income Tax Ordinance - "FATCA", which applies to financial institutions in Israel (banks, certain investment funds, certain portfolio managers and others), was approved on 12 July 2016. Following are the provisions:
- Submitting information on foreign account and account holders to the tax authority in order to transfer it to a foreign country.


- Prohibiting the tax authority from using information thereby relayed for purposes unrelated to FATCA.
- Penalties and sanctions that can be applied to financial institutions for violation of this act.
- Circumstances by which a financial institution many close an account where the required information was not disclosed to the financial body.


OECD


The organization operates a multilateral treaty on mutual administrative assistance on tax issues. According to the treaty, an exchange of information is possible between the member countries, utilizing three methods:


1. Exchange of information pursuant to a specific request by another country.
2. Automatic exchange of information between countries, pursuant to a mutual agreement between the said countries.
3. Voluntary exchange of information where one country provides the other with information that it believes to be relevant to the said country.


Israel has signed the multilateral treaty on 24 November 2015.


CRS - Common Reporting Standard

In force as of July 2014


Similarly to FATCA, the OECD set a uniform standard for compiling financial information in member countries toward the exchange of information among countries for tax enforcement purposes. Inter alia, it provides automatic exchange of information procedures between the countries that adopted the standard, emphasizing foreign resident cross activities (information about activities by a resident of A, managed in B, and vice versa).


The standard comprises another element of the OECD Model Treaty to prevent double taxation (preemptive right in taxation), including an exchange of information clause, but the update relates to the level of detail, tests and reporting automation.


On 27 October 2014, Israel announced that it would adopt the standard by the end of the 2018 tax year through agreements with the relevant various authorities, which require legislative updates.


Israel


The Bank of Israel, which supervises the banks, published a circular on managing risks derived of cross border activities, where banks in Israel are required to take the following measures:


A. Customer declaration about the country or countries of which he is a resident for tax purposes.
Declaration that his income complies with the law governing him and his undertaking to report any change in the tax liability.

Request approval that the customer so acted or, alternately, began a process of voluntary disclosure in the country of residence.

B. Customer waiver of confidentiality toward authorities abroad.
C. Procedures for approving the opening of an account subject to cross border risks.


Approvals of Account Reported in Israel for Banks Abroad


Banks abroad currently request that account holders submit a certificate that the account is managed in the country of residency and that tax is paid in its regard as required by law. A new immigrant is unable to provide such a certificate from Israel (exempt of reporting and taxes for 10 years of his immigration to Israel, as related to revenues generated outside of Israel or derived of assets outside of Israel).


Let's assume a new immigrant from France who holds a bank account in Switzerland. The account, which is not reported in France or in Israel, is facing a problem, because the bank in Switzerland cannot be provided a certificate that the account was reported in the country of residence, France or Israel.


There is a solution for this situation and one can volunteer to pay tax in Israel on current profits from the bank in Switzerland, subject to an individual arrangement with the Income Tax Authority, thus actually sanctioning the account that is now reported in Israel.

Money Laundering


A process of integrating property derived of crime into the legitimate financial system, in order to utilize it with no need to be concerned about the enforcement agencies. The idea underlying the law is that money has a scent.
Three-stage process:
1. Placement stage - Introducing the money into the financial system.
2. Layering stage - Actions to blur the source of the money.
3. Integration stage - Withdrawing the money in its new "laundered" form.


The Prohibition of Money Laundering Law, 5760-2000 led to the establishment of the Prohibition of Money Laundering Authority and its actions led to Israel's removal from the "black list".


According to the law, predicate offenses are severe criminal offenses of a commercial nature. The law does not include tax offenses, except for the offense of fictitious invoices according to the VAT Law.
The fundamentals of a money laundering offense are an action taken with property with the aim of concealing or hiding its source, the identity of its owners, its location, movements or related transactions.


Amendment 14 of the Prohibition of Money Laundering Law - Tax Offenses as Predicate Offenses - Proposed Bill


Severe tax offenses embedded in a specific intent to evade the payment of tax, will be considered predicate offenses. In addition, it grants the customs clerk investigation and seizure authorities as well as the transfer of information held in the Money Laundering Prohibition Authority to the Tax Authority.
- Authorizing the authorities to confiscate funds and assets even before a court ruling (any concealed amount and not just the tax derived thereof).
- The tax authority may obtain information from the Money Laundering Prohibition Authority database, similarly to the police or security entities.
- Maximum punishment - 10 years in prison


Offenses pursuant to Article 117 of the VAT Law:


Will be considered predicate offenses upon the occurrence of one of the following:
- Tax exceeds 480,000 NIS over a period of 4 years or 170,000 NIS per annum.
- A sophisticated tax offense exceeding 120,000 NIS.
- An offense related to a crime organization or terror organization.


Offenses pursuant to Article 220 of the Income Tax Ordinance:


Concealing income of 1M NIS per year or 2.5M NIS in 4 consecutive years (income, not "Taxable Income").
Offenses pursuant to Article 98 of the Land Taxation Law:
Failure to report transactions, omitting the sale or purchasing value of a property right exceeding 1.5M NIS per annum, reporting false details on the identity of the parties to the transaction.


Liability of Tax Offense Accomplice


The law defines liability for those assisting in tax offenses.
One must distinguish between assistance to tax offenses (tax consulting against the law) unrelated to money laundering and between an active action taken by an accountant/lawyer, advising on how to launder money - which is a money laundering offense.


Voluntary Disclosure


The Israeli tax authority has published a voluntary disclosure procedure and it enables taxpayers who did not properly report their capital and income to contact the tax authority and pay the tax due for capital and income, while undertaking not to take criminal action against anyone so doing.

Application Prerequisites:


- Disclosure must be honest and in good faith.
- Information appearing in the application was unknown to the tax authority beforehand and no tax authority or Israel Police investigation was underway in its regard.
- The procedure shall not apply to income derived of illegal activities.
The application will include all of the relevant information: source of capital, sources of income, income amount, tax due.
As part of the temporary order, there are two additional options for filing an application for voluntary disclosure:
1. Anonymous petition
2. Shortened procedure application - Total capital does not exceed 2M NIS and total taxable income derived thereof does not exceed 0.5M NIS.
Based on legislation by which severe tax offenses will be considered an offense according to the Money Laundering Prohibition Law, the temporary orders relating to an anonymous petition and shortened procedure were extended until 31 December 2016 (the regular procedure was in force until 31 December 2016).


Tax Base in Israel


Place of Income Generation Israeli Resident Foreign Resident

Israel Owing Owing
Abroad Owing Exempt


Under the agreements to settle assessments, the source of capital will be examined - whether it belongs to the applicant himself or whether it was received as a gift or an inheritance. The tax applies only to income taxable in Israel, which were not paid.


In light of the information reviewed herein:
- The exchange of information between countries, FATCA, OECD Treaty, standard of automatic information exchange and Israel's resolution to apply the above


- Amendment 14 of the Money Laundering Prohibition Law: Severe tax offenses as predicate offenses
Information becomes transparent and available to the Israeli tax authorities.


This period is a "historical opportunity" to disclose unreported funds, going on until 31 December 2016.
We suggest that you contact the tax authority and file a voluntary disclosure application. Our firm has handled cases in which was have reached assessment agreements and criminal immunity. We will be happy to accompany and advise clients on appropriate matters.

 


The information appearing in this memo does not comprise an opinion and/or legal advice and/or a professional
recommendation.
The information appearing in this memo is intended as general information only and use thereof is subject to the user's exclusive responsibility.



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