Voluntary disclosure has hidden fines

Moshe Asher Photo: Eyal Yizhar

Taxpayers unable to prove the source of their unreported capital will have to pay a fine.

The Israel Tax Authority, headed by Moshe Asher, has announced the extension of the voluntary disclosure proceeding for two additional years, until the end of 2019.

The voluntary disclosure proceeding enables Israelis who have violated the law by not reported all their income and capital to the Tax Authority, as required, to pay their legal tax and avoid criminal proceedings against them.

A close examination of the new regulations reveals that the Tax Authority has made the terms for conforming to the procedure more stringent. This is also true of the abbreviated procedure, which involves tax evasion that does not exceed NIS 2 million. We believe that the requirements should have been made somewhat easier.

The state's repeated claim that the procedure is designed to meet taxpayers halfway is not completely correct.

The state has a very great interest in getting taxpayers to put their reporting of unreported income in order. More importantly, beyond the immediate benefit of additional revenue in the state treasury, the procedure legalizes, and in effect "launders," the unreported money.

In other words, through the voluntary disclosure procedure, the state provides for the transfer of money to the Israeli banking system - an opening that will be closed when the administrative order providing for the voluntary disclosure procedure expires. Once the administrative order expires, the banks will categorically refuse to accept this money, because it may be derived from tax offenses.

Although the Tax Authority did not state so clearly, people on their toes will notice that in addition to immunity from prosecution for tax offenses, the voluntary disclosure also provides immunity from prosecution for money laundering offenses, which is actually the main purpose that it was meant to serve.

Even though this is an equally important state interest, the new voluntary disclosure procedure stipulates that the Tax Authority can reject a voluntary disclosure request whenever the taxpayer is unable to produce document about the income produced and showing the source of the money.

The Tax Authority is demanding that taxpayers provide all the documents relevant to the voluntary disclosure request, including inheritance orders. Many taxpayers, however, including owners of accounts opened decades ago at small banks, are unable to prove the source of the money, and the Tax Authority is therefore now liable to reject their voluntary disclosure request because of their inability to produce those documents.

Furthermore, in contrast to the previous voluntary disclosure procedure, the Tax Authority is adopting an expansive interpretation of its authority to collect taxes from taxpayers in the abbreviated procedure. Although the abbreviated procedure stipulates that when the reports are filed and the tax is paid, subject to approval of the request by the Tax Authority's investigative division, the taxpayer will be given immunity from criminal proceedings, in practice, the tax assessment officers receiving those reports summon the taxpayers to a hearing, and demand, as a condition for immunity, payment of an additional tax on the principal of the money. This applies in particular when the taxpayer is unable to prove the source of the money. The amount of tax required is usually 10% of the amount of money in the banks account 10 years ago. For many taxpayers, this in effect constitutes a fine imposed solely because of their inability to prove the source of the money that entered the bank account opened decades ago.

It therefore follows that the current voluntary disclosure procedure, insofar as the Tax Authority agrees to allow it for such taxpayers, will require them to pay higher taxes than that levied on their income.

In other words, the Tax Authority quite possibly should announce that the condition for immunity from criminal prosecution is payment of a fine beyond the tax levied on the unreported income. This would create more certainty, and is similar to the policy of many countries with similar voluntary disclosure procedures. In this way, taxpayers who have not yet put their affairs in order will know exactly what awaits them if they do embark upon the procedure.

Advocate Boaz Feinberg heads the Zysman, Aharoni, Gayer & Co. ZG-S&W law firm's tax and money laundering department, and Ofir Paz is a lawyer in the department.

Published by Globes [online], Israel Business News - www.globes-online.com - on February 13, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Moshe Asher Photo: Eyal Yizhar
Moshe Asher Photo: Eyal Yizhar
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