.Voluntary Disclosure

The media occasionally report on taxpayers who did not disclose all of their income to the Tax Authorities, who are brought in for investigation in the offices of the income tax and VAT authorities.  Aside from the harm of public disclosure of tax evasion in the civil arena, tax evasion also constitutes a criminal act carrying imprisonment of up to 7 years, in accordance with Section 220 of the Income Tax Ordinance.

The Tax Authority has an interest in encouraging taxpayers, dealers, individuals and officials in corporations who have violated tax laws, and have not reported their income, or who have filed fraudulent reports on their income, to amend their filings and report true data to the Tax Authorities.

To this end, on September 7, 2014, the Tax Authority published the Voluntary Disclosure Procedure, in coordination with the State Attorneys' Office, in which it undertakes that criminal proceedings will not be opened against a party that provides voluntary disclosure in accordance with the Procedure.  This Procedure is in effect until December 31, 2016.

The Voluntary Disclosure Procedure of the Tax Authority was published concurrent with intelligence efforts and investigations carried out by the Tax Authority, in order to identify taxpayers who did not properly report their income from business operations or capital market activity.

In addition to the Tax Authority's investigations of unreported income earned in Israel, it was announced that the Tax Authority has a long list of Israelis with bank accounts outside of Israel, who did not declare their income from these accounts.  Additionally, every unreported transaction in foreign bank accounts could expose their existence to the Tax Authority.

Concurrent with the procedure, the Tax Authority published a Temporary Order regarding requests for Voluntary Disclosure that makes it possible, under certain conditions, to file the request anonymously, and only after determination of the tax liability, to reveal the identity of the Voluntary Disclosure applicant.

The Temporary Order is in effect until June 30, 2016, and it was extended until December 31, 2016.

In accordance with the procedure, requests to institute the Voluntary Disclosure Procedure are filed with the Executive Vice President for Investigations and Intelligence in the Tax Authority, and only he is authorized to approve them.

Conditions for the Voluntary Disclosure Procedure are:

  1. The Procedure will be honest and complete and be done in good faith.

  2. At the time of the request, no investigation or examination is being performed by the Tax Authority on the applicant's matters, including with respect to the spouse of the applicant and companies under their control.

  3. At the time of the request, the Tax Authority has no information related to the Voluntary Disclosure, including with respect to the applicant's spouse, companies under their controls and the files of a partner.

  4. At the time of the request, no examination or investigation is being conducted by the Israel Police with respect to the applicant, his spouse or companies under their control, in a matter related to the Voluntary Disclosure request, including their business activity or any other income-producing activity.

  5. No direct or indirect information exists related to the Voluntary Disclosure request, including with respect to the applicant's spouse, companies under their control and partner's files, in the following places: in other governmental authorities; in the media; in court correspondence or minutes or any other document in civil or criminal proceedings being conducted in a legal jurisdiction within or outside of Israel.

 

The request must be complete and include all of the income not reported as required in Israel.  In accordance with the Procedure, a person is entitled to benefit from the Procedure only once in his lifetime.

The Voluntary Disclosure Procedure applies to violations of the tax laws with respect to:

  1. Income Tax Ordinance (New Version), 1961

  2. Real Estate Taxation Law (Betterment and Purchase), 1963

  3. Value Added Tax Law, 1975

  4. Purchase Tax Law (Goods and Services), 1952

  5. Customs Ordinance (New Version)

  6. Customs Duties and Blu (Change in Rate), 1949

 

The Voluntary Disclosure procedure does not apply to income originating in illegal activity.

At the end of the process, an agreement is signed between the taxpayer and the tax authorities, and the resultant tax liability is paid.  Signing the agreement opens a new page for the taxpayer with the tax authorities.

Taxation of Capital Investments Outside of Israel

On 23/7/2002, the Knesset passed Amendment 132 to the Income Tax Ordinance, which took effect as from 1/1/2003.  The Amendment is based on the recommendations of the Tax Reform Committee published in June 2002. 

 

The Amendment included significant changes in the tax laws, including a change from territorial taxation to a combination of territorial-personal taxation.

  • According to the territorial tax method – tax is paid on a person's income (an Israel or foreign resident) generated in Israel.

  • According to the personal tax method – tax is paid on all of the income of a person who is an Israel resident, including income generated outside of Israel.

 

A combination of the tax methods, as adopted in the Amendment, assures that tax will be paid on all of the income generated in Israel, even if generated by a foreign resident, and that tax will be paid on all of the income of an Israel resident, even if generated overseas.

In other words, commencing 1/1/2003, an Israel resident is liable for tax even on his income generated outside of Israel, including capital income overseas, which includes income from deposits and securities.

When the Voluntary Disclosure is carried out on income originating in investments in bank accounts outside of Israel, the Tax Authority examines the request in two main areas: first – what is the source of the monies deposited overseas, and whether tax was paid on them, as required by law;  second – taxation of the gains earned on the investments, including trading gains on securities, interest and dividends.

 

It is very important that the Voluntary Disclosure be made promptly, since the existence of prior information held by the Tax Authority or the beginning of a Tax Authority investigation before the Voluntary Disclosure is initiated by the taxpayer, will preclude Voluntary Disclosure, and exposes the taxpayer to criminal proceedings.

 

We recommend that the process be performed with assistance and professional guidance that is very familiar with the process and is acquainted with the relevant parties in the Tax Authority.

Our Firm has a wealth of experience in guiding companies, non-profits and units in the Voluntary Disclosure process, which has led to the successful signing of agreements between the taxpayer and the Tax Authority and to absolutely release the taxpayer from criminal exposure.

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