Your bank is talking to the taxman

Money laundering  photo: Shutterstock/ASAP Creative

Foreign banks have been notifying Israelis with unreported accounts that information on them will be given to the Israel Tax Authority.

S. immigrated to Israel from Australia over 30 years ago. To this day, she still has a bank account in Australia, in which she keeps large amounts of foreign currency. A short time ago, she was surprised to receive a letter from her Australian bank notifying her that because she is an Israeli resident, the bank will soon send information about her account and money to the Israel Tax Authority. S. quickly went to the office of Adv. Yoad Frenkel, CPA, former head of the Tax Authority's International Tax Department, who was responsible for exchanges of information, and now a partner (international tax) in the Ziv Sharon & Co. law firm, in order to learn what this means. Why should the Australian bank suddenly volunteer to give the Tax Authority information about her, and what should she do about it?

Frenkel explained that Israel would soon receive financial information about its residents from dozens of countries under the Common Reporting Standard (CRS) international agreement that it signed. "S. was a resident of Australia over 30 years ago and had a bank account in Australia. She was unaware that she had to report it because she was an Israeli resident. She suddenly received a form from the Australian bank notifying her that it was obligated to confirm the fiscal residency of its customers and report them to their countries of residency," Frenkel says. "So we regularized the status of this money in a voluntary disclosure procedure, and the problem was solved (a voluntary disclosure procedure enables Israeli citizens to disclose their unreported capital and assets to the Tax Authority and pay tax on them without being exposed to criminal proceedings)."

There are many people with the same problem as S. In recent months, many people in Israel have received letters from banks throughout the world asking them to confirm their residency "shortly before the banks send the information about them to the Tax Authority in Israel." The reason for this wave of letters is Israel's accession to the system of information exchanges between tax authorities around the world. This system, in which dozens of countries are members, is part of the CRS agreement initiated by the Organization for Economic Cooperation and Development (OECD). The regulations for the actual transfer of information to Israel and from Israel abroad passed the Knesset Finance Committee in January 2019. Starting in July, Israel will begin receiving financial information about its citizens from dozens of countries. It may sound far off, but the mills have been grinding in recent months, with dozens of letters sent to Israelis with overseas bank accounts.

Letters for confirming status

The letters being sent are brief and innocent-looking. All they ask is to confirm the account holder's residence. "Are you an Israeli resident?" the foreign banks ask, but the message behind the words is, "If you are, information about you will soon find its way to the Israel Tax Authority." Israelis are not the only ones receiving such letters. Dozens of countries have signed the information exchange agreement, and citizens of dozens of countries are now receiving greetings from their banks around the world.

"Globes": What happens if someone getting a letter ignores it?

Frenkel: "If someone getting a letter doesn't answer it within a few months, the bank assumes that the information that it has about the account holder's residence listed in the letter is correct. It will act accordingly and send the information. Even if the recorded information about the account holder's fiscal residence is wrong, he or she must still answer the letter and correct the mistake. The information will be sent unless the mistake is corrected. The person receiving the letter must make sure that the information about him or her is correct. If the person is concealing money or is unaware of his or her duty to report it, he or she should hurry to begin a voluntary disclosure proceeding, so that the information is sent only after the money has been disclosed to the Israel Tax Authority."

Concealed or unclear residency

Adv. Leor Nouman, a partner in the S. Horowitz & Co. law firm, has also recently handled quite a few cases of clients who received letters from foreign banks. "The letters from banks in all the OECD countries that have adopted the CRS standards are putting the heat on many clients: both Israeli residents with unreported banks accounts in foreign countries and foreign residents, mainly Jews from around the world, with accounts in Israel, who are still identified by their passport numbers in the Israeli banking system. These customers did not disclose their TIN number - the number recognized by the tax authority in their country of residence."

Nouman says that quite a few clients who received letters recently came to his office. Some of them are returning residents and new immigrants worried about their foreign countries of residence, and some are Israelis who left Israel, "but whether they have terminated their residence in Israel or have not completed this termination is arguable," Nouman says. "I recent met a French businessperson who immigrated to Israel and kept tens of millions in Israel, a large proportion of which he used to buy property in Israel. Since he travels all over the world, there is real concern that he will have problems proving his Israeli residency.

"I also met a woman who had an overseas technology exit of over NIS 100 million, which she did not have to report, and on which she did not owe tax, in Israel. She left Israel for a foreign country and is in the process of acquiring tax residency in that country. She now has various dilemmas involving both the location of the exit and Israel."

Nouman divides the worried account holders into two groups: clients whose residence is clear and are still concealing money in foreign countries and clients whose tax residency is "subject to interpretation."

"The first group of clients with well-defined residence, but who are concealing money in foreign countries is a fairly small group," Nouman says. "The only solution I can offer them is to submit a request for voluntary disclosure in their country of residency."

Concerning the group of clients whose tax residency is subject to legal interpretation, Nouman says, "In the globalization era, the question of whether a person is an Israeli resident spending a great deal of time and doing extensive business overseas, or a foreign resident coming to Israel for vacations, depends on many variables and assumptions, in both Israel and the countries in which he or she lives and operates.

"Holders of these accounts have to declare their place of residency for tax purposes. The CRS regulations are likely to subject them to examination by various tax authorities in Israel and overseas. Their current status could be called into question, which could have consequences, including for their past tax returns. Residency is sometimes unclear, and there are many clients who are tax residents in more than one country."

Nouman emphasizes that when returning residents or new immigrants answer the letter for confirmation of residency that they received from a foreign bank, they must make sure that they can declare that they are residents of Israel. Some of them spend only a few days in Israel (the number of days in Israel is one of the tests for residency). There is a tangible risk about acceptance of their Israeli residence, even if they have received an immigrant or a returning resident certificate and possess an Israeli identity card.

International agreements are eliminating tax shelters

The international exchanges of information are part of a global trend in recent years towards financial transparency. Illegitimate tax shelters are becoming extinct. The international campaign against international unreported capital and the shadow economy has undergone dramatic changes in recent years. Global regulators have declared all-out war on tax evaders and money launderers. After marking unreported capital as a target, they have begun aiming their arrows all over the world. The result has been a collection of initiatives and agreements for exchanging information between countries.

Israel has signed over 50 conventions for preventing double taxation, in which some of the countries undertook to transfer information about income and money of Israelis in their territory. As a result of these agreements, information about Israeli residents has been pouring into Israel for years. The Tax Authority is now also receiving detailed information under the US Foreign Account Tax Compliance Act (FATCA), in which the Israel Tax Authority has begun sending information to the US Internal Revenue Service (IRS) about financial assets of citizens with a connection to the US. The Tax Authority has also begun to receive information about Israelis with bank accounts in the US.

Transparency is now being stepped up with the CRS agreement, which provides for automatic exchanges of information about accounts of foreign residents in Europe and other countries. Early this year, the Knesset Finance Committee approved the CRS income tax regulations (implementation of a uniform standard for reporting and due diligence of information about accounts). Israel thereby joined the system of information exchanges between tax authorities around the world. The CRS regulations are the second and final stage of incorporating the international commitments to automatic information exchanges undertaken by Israel and the adoption of the international standard for information exchanges into internal Israeli law.

The CRS standard was developed by the OECD in order to establish automatic yearly information exchanges for the purpose of mutual assistance in law enforcement between countries. Under the CRS standard, information will be gathered by financial institutions about the accounts of residents of a foreign country - both individuals and concerns. The information will be sent to the authorized authority in the country (in Israel, the Tax Authority) for the purpose of delivering it to the account holder's country of residence.

The financial institutions that will be required to give information to the Tax Authority are entities that accept deposits, manage financial assets, hold financial assets for others, and invest in them: banks, insurance companies, investment funds, etc. The disclosed information will include details about account holders, account balances, and income received in an account. The information will be given through a computer system developed by the Tax Authority.

The regulations will be implemented in Israel in two stages. In July this year, Israel will receive information from 53 countries, to which it will also provide information. In July 2020, Israel will receive information from and send information to 69 more countries. Financial institutions in these countries are accordingly preparing to transfer information, and are sending residence confirmation letters to Israelis before transferring the information to the Tax Authority.

In addition to information received by the Israel Tax Authority from its overseas counterparts, the Tax Authority also has numerous lists of Israelis with overseas bank accounts obtained in "unofficial" ways in recent years. These include the "German list" reported in "Globes," the list of the UBS Switzerland banking group (exposure of which led to the investigation of dozens of non-reporting customers and the filing of a number of indictments in the affair), a list of confidential accounts at the HSBC Switzerland bank, and the Panama documents.

Are there still dark corners in which money can be concealed? Frenkel says that very few places anywhere in the world are not transparent now. "There are countries that have not joined CRS, so theoretically, technically, money can be concealed there. For example, there are countries in Eastern Europe, such as Estonia, and in the Far East, that considered joining the CRS agreement, but did not sign it. There are countries with no timetable for exchanges of information with them, if information is ever exchanged, such as Cyprus. There are also many African countries that did not join the information exchanges. Although they may be safe for unreported capital for the next two or three years, however, there will be nowhere to hide in the long term."

Published by Globes, Israel business news - - on May 13, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Money laundering  photo: Shutterstock/ASAP Creative
Money laundering photo: Shutterstock/ASAP Creative
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