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8 September 2014

Voluntary Disclosure procedure announced

Yesterday (7th September 2014), the Israeli tax authority finally published their long-awaited and anticipated Voluntary Disclosure scheme.

Anyone who has committed a tax felony, be it related to Income Tax, VAT, Mas Shevach (Land Appreciation Tax) or Customs, can now come forward, report the income, pay the tax (including all interest and fines), and - provided they meet the other criteria - get immunity from criminal prosecution.

The immunity from prosecution is dependent on the taxpayer meeting a number of criteria. In general, these require that a full and thorough disclosure be given. Furthermore, it is a requirement that the taxpayer cooperates fully with the Authorities during the entire procedure.

It is also required that an investigation has not been started on the taxpayer regarding non-reporting of income or assets - either by the tax authority or some other governmental agency (including the police). Although this has yet to be confirmed, it appears that receipt of the "fishing" letter recently (see more here) would not prevent someone from entering the procedure.

The head of tax authority has indicated that there are now multiple sources of information that the authorities can and are/will be using to discover tax evasion, and they will be hitting people hard. One has to assume that, as well as severe fines, there is the intention to prosecute offenders.

As such, it is highly recommended that anyone who has unreported income or transactions to enter the scheme as soon as possible. The only generous aspect is that the procedure is in place as of now, and until 31st December 2016. Of course, it would be wise to get your application in much sooner than that, so as to reduce the chances of the authorities having started an investigation.

At present, the exact mechanics of the scheme are not entirely clear. But, in general, the process will work as follows:

(1) Application is made to the Investigations Bureau of the Tax Authority (by email!!). They will either approve the application or reject it.
(2) Assuming the application is accepted, the file is passed to the local Tax Assessor, who will agree the taxes to be paid - including interest & linkage, as well as fines if the Assessor deems fit.
(3) Payment of the tax due by the taxpayer.
(4) No criminal prosecution is guaranteed.

Simultaneous to the disclosure procedures, the Tax Authority also published a Temporary Order. This gives two interesting options, available only for a year (i.e. until 6th September 2015):

(1) Anonymous Route - you can enter the procedure without intially disclosing your name or other identifying details. Of course, all income and assets need to be described and detailed. Within 90 days of the file being passed to the local Assessor, you have to disclose your name for further checks - although this can be extended by a further 90 days if the local Assessor deems this necessary and reasonable.
(2) Green Route - if the unreported assets are valued at less than NIS 2 million, and the unreported income totals less than NIS 500,000 (seemingly the total unported income), the local Assessor will not investigate the amounts of tax to be paid, but will rather simply issue a payslip for payment of taxes. One cannot be anonymous for this route.

One further clarification given is that capital losses reported by the disclosure can only be offset against income and gains reported in the disclosure. Furthermore, any pre-existing losses cannot be used for offset, nor will any resulting loss be available for future offset.

The Voluntary Disclosure procedure can be seen here (Hebrew)
The Temporary Order can be seen here (Hebrew)

In summary, anyone with any unreported income is strongly advised to take this opportunity offered by the authorities to come clean and report.

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