The headquarters of Israel's central bank in Jerusalem, Aug. 19, 2013.
Bank of Israel headquarters in Jerusalem. Photo by Bloomberg
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The Bank of Israel Sunday advised Israeli banks to begin gearing up to provide information about their U.S. clients to U.S. tax authorities, as provided in the U.S. Foreign Tax Compliance Act.

The statement was issued by the central bank in an effort to ensure that Israeli banking institutions will be ready to comply with FATCA when it goes into effect, in July. The purpose of the act is to help U.S. authorities collect any taxes owed by U.S. citizens, wherever they may live, with accounts at banking institutions outside the United States.

Israeli banks are subject to laws in Israel, and not to U.S. laws such as FATCA. Until now, Israeli banks were obliged to protect their customers’ privacy and were forbidden from providing information on account holders to any parties unless Israeli regulators explicitly stated otherwise.

The banks had expected Israel’s central bank to push them to comply with the U.S. crackdown, though. Doing otherwise could expose the banks to U.S. sanctions, including limits on their branches within the United States.

Sunday’s order brought Israel’s banking system in line with many others that have given in to American demands, including Switzerland’s banks, which had been well-known for their privacy.

As far as is known, the step was taken following advanced negotiations between Israeli government officials and their U.S. counterparts. The bilateral deal would include an Israeli commitment to provide the required information about the American customers of Israeli banks. In return, the United States is expected to commit to provide the Israeli government with comparable data on U.S. banks’ Israeli customers.

Most Israeli banks have been preparing for two years for the introduction of FATCA in Israel, informing their U.S. customers about the anticipated requirement and its implications.

It is assumed that any U.S. citizen seeking to evade the reporting requirements has already withdrawn their funds from Israeli banks and turned to other investment channels, such as Israeli real estate, which is not subject to regulation under FATCA. Others have voluntarily disclosed their assets to the U.S. Internal Revenue Service.

In its press release, the Bank of Israel noted that the U.S. Treasury Department had passed regulations in January 2013 for the implementation of FATCA, effective from July 1, 2014. Among other things, FATCA requires foreign bank to deduct tax payments from the accounts of their U.S. customers if the customers do not cooperate with the banks in complying with FATCA.

Noncompliant banks, meanwhile, risk sanctions, including a 30% deduction of funds transferred from the United States, the Bank of Israel statement noted.

U.S. authorities suggest that countries enter into bilateral agreements with the United States that provide for liberalized implementation of FATCA in general and for noncompliant bank customers in particular.

The bilateral agreement with Israel has yet to be finalized. Sunday’s statement included a draft agreement Israeli banks should follow whether or not a final agreement is signed before July 1.

Meanwhile, the Tax Authority is currently advancing an amendment that would enable Israel to enter bilateral agreements to share data with foreign tax authorities. This means Israeli authorities would have access to information on assets held abroad by Israeli citizens, while foreign governments would receive information on their own citizens’ assets in Israel. No such arrangement currently exists in Israel.