On 13.12.2017, the Tax Authority issued an additional temporary order regarding the Voluntary Disclosure Procedure. The provisions therein are essentially similar to the provisions of the previous procedure – that is, the state’s pledged that criminal proceedings will not be initiated against those who make a voluntary disclosure in accordance with the terms of the procedure – including, honest and full disclosure, when at the time of the application, the Tax Authority does not have information related to voluntary disclosure. The procedure will apply until 31.12.19.

According to this procedure, there are three routes for submitting an application:

1.      Regular route;

2.      Anonymous route – This route will apply until 31.12.18;

3.      Short route – In relation to capital of up to NIS 2 million, and in addition, taxable income of up to NIS 0.5 million;

Avoidance of Criminal Prosecution

In July 2017, the Tel Aviv Magistrate’s Court sentenced Yitzhak Svid to 16 months imprisonment, probation for 8 months, and a fine of NIS 70,000, for failing to disclose and pay tax on interest income that accrued to him between 2003-2011 on funds he deposited in an account in Switzerland. This sentence was rendered after Mr. Svid removed his tax blunders and paid a total tax of NIS 349,654. It should be noted that during the trial, Mr. Svid claimed that the information regarding the account reached the authorities due to whistleblowing of his daughter’s divorcee.

In this regard, it is likely that after the criminal proceedings were initiated against him, that is, actual imprisonment of 16 months, after Mr. Svid paid the full tax – Mr. Svid’s options to raise civil claims regarding the way the tax was calculated were limited. In addition therewith, Mr. Svid was fined NIS 70,000.

Insofar as Mr. Svid would have battened down the hatches and apply to the Tax Authority for a voluntary disclosure procedure before the information thereabout was forwarded to them, he could have avoided the criminal proceedings altogether!

What is a Voluntary Disclosure Procedure?

During 2014, the Tax Authority published Voluntary Disclosure Procedure 7.9.14, which allows taxpayers who violated the law and did not disclose all of their income and capital as required, to carry out a voluntary disclosure procedure, pay the tax liabilities legally; and on the other hand, the Tax Authority pledges to refrain from initiating criminal proceedings for the offenses committed, in accordance with the conditions stipulated in the procedure. According to the conditions, it is required, inter alia, that at the time of disclosure the Tax Authority does not have information related to voluntary disclosure or an investigation/inspection is underway regarding the applicant. Also, it is required that the disclosure be honest and complete and be made in good faith.

As mentioned, the avoidance of criminal proceedings is a substantial benefit, however, at the same time, there is uncertainty regarding several which arise in many cases during the processing of an application for voluntary disclosure, and which affect, inter alia, the tax liabilities deriving from the procedure. Below are some examples:

1.      Fund taxation – statute of limitations – For example, is there a tax liability for initial capital deposited abroad decades ago? Lack of references – how to tax the fund when it is not possible to provide sufficient references that support the taxpayer’s explanation regarding their source?

2.      Current income taxation – In accordance with the temporary order, the application must include all relevant information, including the relevant tax years. What are the relevant tax years?

3.      Funds originating from a deceased taxpayer – How will the fund be taxed; how will the current income be taxed until the date of the taxpayer’s death?

4.      Disagreement regarding the tax liability – In accordance with the wording of Section 15 of the new procedure, no criminal proceedings will be initiated if the tax is paid according to the determination of the civil entity. What does the law stipulate if there is no agreement regarding the tax liability?

The new Voluntary Disclosure Procedure is a continuation of the previous publications:

2005 Voluntary Disclosure Procedure

Voluntary Disclosure Procedure 15.11.11

Clarification regarding Offsetting Losses 28.10.12

Voluntary Disclosure Procedure 15.11.11 – Extension and Anonymity

Thereafter, on 8.12.2014, an executive order was published, in which instructions and clarifications were given regarding the new procedure:

Temporary Order 7.9.14

Voluntary Disclosure Execution Order 11-04

It seems that the Tax Authority is applying the conclusions from past handling of applications for voluntary disclosure, and in order to streamline the handling of applications for voluntary disclosure and to maintain uniformity, it was determined that in each assessment office, designated supervisors will be appointed to handle applications, which will be subject to referents in the professional division.

It was further determined that the assessments and agreements in voluntary disclosure files will be approved by the assessing officer or his deputy.

As part of the execution order, reference is made to the handling procedure in the three routes: The regular route, the anonymous route and the short route – submitting applications via email, receiving a reference for submission, shortened times for processing applications (both in the regular route and in the anonymous route), signing a partial agreement on the disclosure elements only, etc.

It is likely that the aforementioned guidelines will streamline the processing of applications, however, they do not come to specify and clarify anything regarding the position of the tax authority and/or the discretion of the tax authority on various issues, such as:

·         An application in a regular route that complies with the conditions of the procedure, but the tax payment was not settled with the assessing officer – what does this mean? Let’s say that a taxpayer claims with respect to income, that it is capital gain, and the tax authority believes that it is a yielding income.

·         An application whose processing does not end within 90 days or within 180 days.

·         Anonymous application – Allegedly, in accordance with the executive order, an application may not be accepted at this stage – What criteria are examined at this stage? Is the calculation of the taxable income and the tax estimate part of the consideration?

·         Anonymous application – Allegedly, the assessing officer has the possibility of further consideration regarding the determination of the tax liability – After ascertaining the tax liability, disclosing the name, obtaining the approval of the investigation department, the assessing officer must conduct an examination regarding the correctness of the report and the absence of contradictory data – What does this examination mean? Under what conditions can the assessing officer claim that the report is incorrect, and the tax liability must be increased?

·         Short route – When an application is suitable for handling – Is it according to the fund at the time of submitting the application? Is it in accordance with the calculation of the taxpayer’s taxable income?

·         Short route – What are the criteria for it to be determined that a tax assessment will be conducted in the case? What are the criteria for transferring an application to a regular route?

Simultaneously with the publication of the new procedure, a temporary order was published which is valid for a period of one year, in order to encourage taxpayers to initiate the voluntary disclosure process. The temporary order allows taxpayers to submit an application for voluntary disclosure in two alternative routes:

1.      Short route – In relation to capital that does not exceed NIS 2 million, and the taxable income deriving therefrom does not exceed NIS 0.5 million.

2.      Anonymous route – The assessing officer may transfer from an anonymous route to a short route if the conditions for a short route are met.

In this context, we shall note that in accordance with the notice of the Tax Authority dated 10.8.14 in relation to the requirements for filling out Form 5329 which was sent to many taxpayers, it appears that, except for exceptional cases, no criminal proceedings will be initiated against taxpayers who did not report rental income as required.

Further thereto, we shall add that when it comes to substantial income, it is possible that the appropriate way to remove the default is through the voluntary disclosure route.

The aforesaid indicates that the Tax Authority is working with the aim of expanding the circle of those who report, so that additional tax collection is possible, both in relation to past years and in relation to future reports, while avoiding taking actions at the criminal level in most cases. Below are some examples of tax offenses that can be settled in the voluntary disclosure procedure:

1.      Failure to report and pay tax on financial income in bank accounts abroad;

2.      Failure to report and pay tax on business income in Israel and/or abroad;

3.      Failure to report and pay tax on rental income in Israel and/or abroad;

Regarding the bank accounts abroad, we shall note that according to representatives of the Tax Authority, currently, the Tax Authority has information on thousands of Israelis who have bank accounts abroad. In relation to the aforementioned, an application that will include information about a bank account which the Tax Authority has information about at the time of submitting the application, which does not meet the conditions of the procedure, will therefore be rejected. At the same time, in certain circumstances, the aforementioned application may ease the position of the Tax Authority and the actions taken by it towards the applicant.

It should be remembered that the Tax Authority continues to act in various ways to increase the database, including in relation to bank accounts abroad, so that an application for voluntary disclosure that was submitted today and accepted, may be rejected if submitted at a later date, since the Tax Authority will have information thereabout.