One million Israeli citizens are likely to soon receive a letter from the banks asking them to fill out various statements and tax reports. The OECD's Customer Reporting Standard (CRS) agreement is scheduled to take effect in Israel next year, under which the banks must contact every Israeli resident with foreign citizenship in order to verify that the money in his account has been declared and the legally required tax has been paid in the relevant country. This is the implementation of an international convention in which the tax authorities in various countries will disclose to each other information about money possessed by foreign residents in each country for which there is a suspicion that tax was not paid.
Under the original plan, the banks in Israel were to have given the Israel Tax Authority information about foreign residents starting in June 2018, while the Tax Authority was to have given the figures to other tax authorities around the world approximately in September 2018. In return, the Tax Authority is to receive from foreign countries particulars of overseas bank accounts belonging to Israelis. It is believed that such information has potential to add billions of shekels to tax revenues.
In addition to the rights, however, there are also duties. If Israel wants to obtain information about the overseas accounts of its citizens, it must provide information about the accounts of its citizens with foreign citizenship.
In order for implementation of this process to begin, the Knesset must enact legislation with regulations that have not yet been established. The matter is on the agenda of the Knesset Finance Committee, which already held a discussion about it last week. According to Tax Authority head Moshe Asher, Israel and only seven other countries are on a list of countries that have not yet completed the process, out of a list of 102 countries that have signed the agreement. The other seven countries include Qatar, Saudi Arabia, Tobago, and others. "In the first stage in September 2017, nearly 60 countries already transferred information in the framework of the agreement's implementation. We must complete the legislation as quickly as possible, so that we can meet the international standards," Asher told the Knesset.
"An exhausting task"
The Knesset's meeting on the subject revealed the complexity of the matter. According to estimates heard in the discussion, one million bank customers in Israel are likely to be called upon to fill out various declarations and tax reports - citizens with foreign citizenship. Transfer of the information is to take place only in cases in which the customer is defined as a foreign resident for tax purposes. At the same time, the banks are likely to adopt a conservative attitude by checking all of their customers with foreign citizenship, because if they do not provide the required reports, they will face criminal sanctions.
"The banks in Israel are expected to prepare for a comprehensive and exhausting task of information gathering. It is likely that due to the wish to cooperate fully and completely with the new rules in a way that will leave no doubt in this matter, they will contact an extremely broad 'suspicious' population," former Tax Authority manager, accountant Gidi Bar-Zakay, who specializes in voluntary disclosure procedures, predicts.
According to Bar-Zakay, this widespread phenomenon in Israel is due to the country's special character. "Israel is a country of immigrants, and because residence for tax purposes is determined according to the center of life test, many inquiries are likely to be directed to people with foreign citizenship or a foreign passport who are residents of Israel, and whose tax reporting both in Israel and overseas has been impeccable. In such a case, every citizen receiving an inquiry from a bank will have to individually prove to the conservative banks that he or she is a resident of Israel for tax purposes, not an overseas resident. It is not going to be easy for either the banks or the people who receive in the inquiries," he predicts.
Not the first time
The banks already acquired experience in this process when they had to implement the Foreign Account Tax Compliance Act (FATCA) rules requiring financial institutions around the world to report on the accounts of US citizens to the US authorities accounts.
The banks contacted 300,000 customers at the time, only one third of the number that will be contacted to implement the CRS. FATCA implementation cause quite a few confrontations between the banks in Israel and their US customers, and the banks had to apply sanctions in the form of freezing accounts or refusing to carry out transactions in accounts that had not been reported as required.
"We expect the level of friction with the banks customers following these regulations to be far greater than it was in the agreement with one country - the US. The agreement here is with over 100 countries," Association of Banks in Israel CEO Moshe Pearl foresees.
Pearl suggested lowering the threshold for reporting on accounts. For the sake of comparison, according to the FATCA rules, the banks must report accounts with over $50,000. "We propose raising the threshold. We can't contact every customer with a few thousands shekels in his account," Pearl said.
Knesset Finance Committee chairman MK Moshe Gafni (United Torah Judaism) agreed with this statement, and called on the Association of Banks to meet with the Tax Authority and the Ministry of Finance to consider whether a threshold could be set above which reporting would be required. "As they are now, the regulations are likely to seriously harm many customers having only small accounts. We must therefore set a much higher threshold than what appears in the regulations, which talks about $1,000 or more," he said.
Legal sources say, however, that exempting small accounts is a problem. "In this case, an international convention is involved. It's impossible for each country to decide about whom it reports and does not report," a legal source said.
In its announcement, the Knesset Finance Committee said that the authorities in Israel had acceded to the Finance Committee's request to exempt charity funds of foreign residents with up to $50,000. Small charity funds were also exempted from the FATCA regulations.
Published by Globes [online], Israel Business News - www.globes-online.com - on November 7, 2017
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