Voluntary Disclosure – How to Put an end to Sleepless Nights

Adv. Shalom Balas, shibolet & Co.

For the past few years the tax authorities in Israel and all over the world have been waging a large-scale, persistent war on tax evasion. In this context, the tax authorities have invested considerable efforts in detecting accounts that were not duly reported to the authorities.

One of the standard bearers in the war on tax avoidance and tax evasion is the US, which, among other things, enacted FATCA – the Foreign Account Tax Compliance Act, which imposes on all financial institutions in the world the duty to report account holders who are US citizens or have a particular affiliation with the US.

Additionally, the US has taken action against various banks, including banks in Israel, which, in the opinion of the US tax authorities aided US citizens in avoiding taxes, imposing huge fines on these institutions. Thus, for example, Bank Leumi was required to pay fines to the US tax authorities amounting to over one billion shekels.

As part of these efforts, the tax authorities in many countries, including Israel, have signed numerous bilateral agreements with their counterparts in a large number of countries across the globe for the exchange of information. It is further noted that part of the information relating to accounts held by foreign parties leaked from the banks and is currently in the possession of the various tax authorities.

Furthermore, tax authorities worldwide also opted for a more stringent path and are imposing heavy sanctions on parties failing to comply with the required reporting and tax obligations, as well as on any and all parties aiding the assessees.

Following the above actions by the tax authorities, banks too are presently taking steps to toe the line and sanction the accounts. Thus, among other measures applied, the banks requested that clients settle their reporting obligations in their countries of residence, and are working to close the accounts of customers failing to reach arrangements as regards their reporting and tax obligations.

Thus, slowly but surely, the options for holding money in undeclared accounts are dwindling.

Following the substantial developments in the past few years and the escalating efforts to locate tax evaders, tax authorities around the world, including the Israeli Tax Authority, have decided to permit tax evaders to “repent” and themselves report their evasions, pay the relevant taxes, and benefit from immunity from criminal proceedings in the framework of the voluntary disclosure procedure.

The voluntary disclosure procedure is relatively long-standing, and it allows assessees who have committed offenses according to the tax laws to amend their reports and file accurate information in return for the withdrawal of criminal exposure.

The voluntary disclosure procedure evolved in Israel in the past few years following steps taken by the Tax Authority to open a small window of opportunity with the aim of eradicating the phenomenon of unreported accounts.

In practice, in the framework of this procedure, thousands of voluntary disclosure applications were submitted to the Tax Authority, in which framework the staggering sum of fifteen billion shekels was reported and hundreds of millions of shekels were paid in taxes.

The Tax Authority also defined various mitigating arrangements for foreign trusts in the wake of the legislative amendments due to the doubt regarding the reporting and tax obligations applying to these trusts. In this context as well, hundreds of millions of shekels were collected.

The new voluntary disclosure procedure is valid until December 31, 2016; however, the final date until which  anonymous applications for voluntary disclosure may be submitted, which was recently extended, has not yet been published. In other words, an assessee may submit a request for voluntary disclosure that contains the necessary information without disclosing the name or identification particulars of the account. The anonymous application is designed to enable the assessee’s representatives and the Tax Authority to reach an acceptable arrangement with regard to the tax obligation, particularly in light of concerns on the part of assessees regarding disputes relating to the tax obligation once their particulars have been disclosed.

It was also determined that assessees may approach the Tax Authority in an expedited and summary proceeding specifying relatively low amounts of capital, but in this track applications may not be submitted anonymously, and there are other disadvantages as well.

As a firm that has handled a great many voluntary disclosure cases in the past few years, we emphasize that in practice things are somewhat complex and occasionally differ from the provisions of the procedure. Consequently, one must be thoroughly familiar with the field in order to avoid problematic pitfalls. In this context, before applying for voluntary disclosure, profound, thorough professional groundwork must be done in order to evaluate the body of circumstances and examine all the alternatives until the best course is ultimately chosen, which will protect the assessee from criminal proceedings and at the same time, reduce the tax obligation to a minimum.