Fearing the ripple effects of U.S. tax regulations concerning foreign assets of American taxpayers, Israel's Finance Ministry has established a committee to review the rule's implications.
The new rules, set to take effect in 2014, are mandated by FATCA - the Foreign Account Tax Compliance Act. They require Americans with foreign assets that exceed a certain threshold to report those assets to the Internal Revenue Service. They also obligate foreign financial institutions to report directly to the IRS about accounts held by Americans. Institutions that fail to report foreign holdings of more than $50,000 will be slapped with a punitive 30 percent withholding tax on all U.S. income they receive.
"Implementation of FATCA's directives by Israeli financial institutions is expected to raise many problems, considering the many obstacles that exist in Israeli law and the operational costs those [financial] bodies will have to bear," the Finance Ministry said.
The newly-established finance committee will look into a range of issues, including the possibility of entering into a bilateral agreement with the United States, "which will ease the burden of the financial institutions," according to the announcement, released August 2. Committee members include Bank of Israel, Justice Ministry and Securities Authority representatives.
In April, Haaretz reported that Bank of Israel Governor Stanley Fischer was considering asking the cabinet to reach such an agreement. Philip Stein, of the Jerusalem-based firm Philip Stein & Associates, said this would be "very much in the interest" of Israel. "FATCA is not going away," he said.
Stein also added that the committee's establishment is long overdue. The private sector, he noted, has been examining the potential implications of FATCA for close to a year. "The Israeli government has finally realized that it will have to make a decision."
A spokesman for the Bank of Israel, Yoav Soffer, told Haaretz this week that it was too early to predict whether a bilateral agreement with the United States would be forged. "Let's wait until the committee completes its work," he said.
Several European countries - including France, Germany, Italy, Spain, and the United Kingdom - have already entered into agreements with the United States under a "model intergovernmental agreement" that establishes a framework for financial institutions' reporting certain account information to their own tax authorities. Those authorities, in turn, report to the IRS.
Two Israeli banks - Bank Leumi and Bank Hapoalim - have begun requiring its U.S. customers to sign a document declaring that they have complied with the U.S. tax authorities' reporting requirements. Those that do not could have their accounts frozen.
FATCA was enacted in 2010 in an attempt to track down U.S. citizens who hold off-shore financial accounts and have not disclosed their earnings. While the U.S. can recoup billions of dollars in lost tax revenues through this act, banking industry observers say the burden of compliance for foreign financial institutions, including penalties, could run into hundreds of millions of dollars.
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