With respect to the New Voluntary Disclosure Procedure of the Israeli Tax Authority (hereinafter: ITA) published December 2017, which has been covered in the Newsletter dated, January 1, 2018, the ITA now published Guidelines (instructions for income tax: number 2018/5) as to the implementation of the New Voluntary Disclosure Procedure. These new Guidelines contain instructions and clarifications as to the manner in which applications for Voluntary Disclosure (hereinafter: VOD) should be processed.
Summary of the Voluntary Disclosure Procedure
The New Voluntary Disclosure Procedure provides for the following three different routes:
Under the Regular Route, the taxpayer will submit an application to the investigations Department of the ITA. The application should include the taxpayer’s details as well as the amount of undeclared income, the amount of undeclared capital and the estimated tax due. This route will be in force until December 31, 2019.
The Anonymous Route enables the submission of an anonymous application. This application will be reviewed by the relevant tax assessment officer and only after conclusion of the negotiations about the tax liability will the identity of the taxpayer be disclosed to the tax authorities. This route will be in force only until the 31 December, 2018.
The Shortened Route is possible where the capital involved in the voluntary disclosure application does not exceed the amount of NIS 2,000,000 and the taxable income derived from this capital does not exceed NIS 500,000 in the relevant tax years. With this route the application must include the identity of the taxpayer. The application is submitted by way of amended tax returns for the relevant years. This route is in force until December 31, 2019.
Under certain conditions the Voluntary Disclosure Procedure will grant the taxpayer immunity from criminal proceedings. One of the main conditions is that at the time of the submission of the application for VOD, no investigation or examination is conducted against the taxpayer and the ITA has no information about undeclared income of the taxpayer. Furthermore, the ITA will not grant immunity if the application is not fully complete and true and the tax is not paid within the period stated in the agreement or within 15 days from the date of payment notice in the case of the application submitted under the Shortened Route.
It should be emphasized that the result of the procedure is not the reduction of any tax liability. Rather, the taxpayer has to pay the applicable tax liability on the declared income.
The New Guidelines for the implementation of the Voluntary Disclosure
The New Guidelines published by the ITA on February 13, 2018 are to clarify the manner, in which applications for VOD are to be processed, along with the handling of applications by the assessing office.
- Submission of documentation
According to the Guidelines documentation about the source of the funds and the time when the gains were generated are to be submitted along with the application for VOD. It should be noted that sometimes the voluntary disclosure goes back several years and covers decades and several generations, where there is often no information about the development of the capital and/or source of the capital available. The result is that the attachment of the necessary documentation might not be possible. Nevertheless, the Guidelines emphasize that when the required documentation is not provided the application will be rejected.
- Imposition of Fines or Financial Sanctions
The Guidelines provide for the implementation of optional fines in contrast to obligatory fines. The Guidelines, thereby give a list of considerations for the relief and reservation of optional fines. Thus, the assessing officer has the authority to reduce or cancel financial sanctions and fines, if for example the total taxable income derived from the VOD is not material in comparison to the capital of the taxpayer or the involvement of the taxpayer of not reporting or the degree of disobedience is small. Furthermore, the assessing officer should also take into consideration the personal and health status of the taxpayer in the decision about reducing or cancelling the optional fines.
The justification for the optional fines is not quite clear. If the government grants the taxpayer criminal immunity by confirming the request for VOD submitted by the taxpayer, it is not obvious at all why the government should impose fines or civil monetary sanctions which are punitive in nature.
- Recommendation that the representative of the client signs a declaration with respect to the assets and the income from the assets
In the Guidelines it is recommended that the representative of the taxpayer signs an Appendix where he should declare that the reported balance of the account of the taxpayer is accurate and declare all deposits and withdrawals from the account in the relevant voluntary disclosure period. Furthermore, the representative should declare that to the best of his knowledge only the taxpayer has the right to the account and that the taxpayer has no undeclared additional assets besides the ones submitted in the respective VOD. The stated purpose for this recommendation is to shorten the process of the Voluntary Disclosure application and to save examinations required to be undertaken by the assessing officer.
- No tax on the capital – if the source of the capital was not subject to tax
Normally, in addition to the taxation of the income in the relevant years of the Voluntary Disclosure the assessing officer imposes taxes on the opening balance of the capital. According to the Guidelines of the ITA the assessing officer should refrain from imposing a tax on the capital if he is convinced that the source of capital has not been subject to tax in Israel. This pronounced restraint from the taxation of the capital is very positive and mostly welcome. As examples, when the capital should not be taxed, the Guidelines mention income, which is generated by a non-Israeli resident and/or capital received as gifts or by way of inheritance. It should be emphasized that this has been the existing legal situation and in despite of this the tax authority has regularly imposed tax on the capital in the past.
- Carry forward losses and tax credit
According to the Voluntary Disclosure and Guidelines, losses and foreign tax credits which were accumulated in the Voluntary Disclosure Procedure can be used only to offset ordinary income or capital gain which is discovered and submitted in the Voluntary Disclosure. Losses and tax credits not used cannot be carried forward to the following years. In addition, losses and tax credits of previous years for which tax returns have been submitted cannot be used to offset income which is declared and submitted in the VOD.
- Assessment in case of a deceased person
The Guidelines also mention para. 120 of the Israeli Income Tax Ordinance, which relates to the law applicable in cases where a deceased person has undeclared income. Para 120 determines that the heirs are liable for the tax generated in the current year of death and the three previous years. The new Guidelines mention the para without elaborating in more detail as to the application of the provision.
The New Voluntary Disclosure Procedure provides for three different routes.
The newly released Guidelines contain some clarifications as to the manner an application for VOD is to be processed. In generally it seems that the Guidelines impose a difficult standard as to the fulfilment of the conditions for an application, especially with the necessary documentation required and the recommended declarations to be made by the representative of the taxpayer. Very positive and mostly welcome is the statement that the capital will not be taxed if it had not been subject to Israeli tax.