By David Halbwax L.L.M, International Legal Counsel
The automatic exchange of information is part of a global context which for several years has aimed at strengthening international cooperation in the fight against tax evasion.
By subscribing to the OECD Common Reporting Standard (CRS) regulations in 2019, the State of Israel has joined the international system for the exchange of information between tax authorities around the world.
In this article, our firm presents the content and the effects of CRS implementation in Israel, which STILL have severe consequences.
Content of CRS (Common Reporting Standard) regulations
To fight tax evasion, the Organization for Economic Cooperation and Development (OECD) set up in 2014 a system for exchanging financial information between countries: The Common Reporting Standard (CRS)
CRS has been inspired by the American model FATCA (Foreign Account Tax Compliant Act), which has set up a system for transmitting tax information held by financial institutions to American tax services.
However, the CRS is much more legally binding due it is a global and harmonized tool of fiscal which is imposed on more than 104 countries, including the State of Israel.
The objective is to establish automatic annual information exchanges for the purpose of mutual assistance in the application of tax law.
Which financial institutions are involved and how the exchange of information is working between countries?
The financial institutions that must comply with the automatic exchange of information are the entities that accept deposits, manage financial assets, hold financial assets on behalf of third parties and invest: banks, investment funds, insurance companies.
The financial institutions concerned are required, without being able to oppose banking secrecy, to transmit to the competent tax authority the information concerning the holders of bank accounts whether they are individuals or companies which are residents of another countries applying CRS regulations.
In short, the tax authorities of the CRS member countries must receive information relating to the financial assets held by their tax residents abroad each year.
The information disclosed includes certain details:
– Account holders and account balances
– Income received on accounts (dividends, interest)
– Income from certain insurance contracts.
The information is sent to the competent tax authority in the country for forwarding to the country of residence of the account holder.
The CRS regulatory law was adopted in Israel on January 1, 2019 with effects that need to be considered
CRS regulations effects in Israel
Israeli financial institutions are presently required to gather all information on all accounts opened since January 2017 belonging to non-residents.
The information collected is then transmitted to the Israeli tax administration (ITA), which in is automatically transmited it to the tax authorities to which account holders are attached, for example France.
This system concerns all customers: individuals and corporate entities.
Thus, Israeli financial institutions are required to report to the ITA when the bank account belongs to a client whose tax domicile is in another country participating in the CRS system.
To carry out this operation, financial institutions are gathering information in their possession (surname, first name, passport number and contact details of the holder, account number) but also ask their customers to provide information regarding their tax identification number, name of individuals or companies that actually control these accounts.
Once the data has been analyzed, financial institutions must transmit information to the Israeli tax administration, which it exchanges information with the tax services of the other countries belonging to the CRD system.
But much more. This automatic exchange of information system has already had severe consequences in Israel and creates difficult situations since it generates numerous arrests and criminal proceedings.
Recently, in its edition of July 8, 2020, GLOBES has revealed that an Israeli citizen was currently being prosecuted for tax evasion following the concealment of this income abroad.
The suspect, who has been a resident returning for 13 years, is suspected of not having declared the existence of foreign bank accounts with assets exceeding 112 million Shekels.
This case has been preceded by a series of arrests that occurred in 2019, based on information sourced from European countries about Israelis holding undeclared funds and financial assets in Switzerland and on the island of Jersey, for a volume of 77 million shekels.
In addition, the CRS system may have other repercussions insofar as it is up to the banks to qualify clients of residents or non-residents, in particular with regard to new immigrants and returning residents who are not obliged to declare their income for 10 years.
In this situation, the absence of a declaration could be interpreted by the banks as a sign of non-residence status, which may contribute to forward erroneous information to the tax authorities!
Due its experience and the resources at its disposal, our firm can provide with all the assistance necessary to ensure the respect and preservation of your rights in such situations.