Israel will be joining an international mechanism for the sharing of information on financial accounts, the Finance Ministry announced Monday. The cross-border exchange of information, which is due to be in place by the end of 2018, is expected to make it more difficult to evade paying taxes on financial assets.
The announcement could have dramatic implications for overseas investors with undeclared assets in Israel. Once the new system is in place, the assets would be automatically disclosed to participating foreign tax authorities. It would also affect Israelis with undeclared financial holdings abroad, which the Israel Tax Authority could be informed of. The Common Reporting Standard, is expected to expand to a network of about 50 countries, the Finance Ministry noted.
Formally called the Standard for Automatic Exchange of Financial Account Information, the mechanism was developed through the Organization for Economic Cooperation and Development (OECD), a grouping of the world’s developed economies in which Israel is included. It is patterned on FATCA, the United States Foreign Account Tax Compliance Act, pursuant to which Israel and the U.S. have a similar information-sharing arrangement, which goes into effect next year.
Israelis hold tens of billions of dollars of undeclared assets abroad, Israel Tax Authority chairman Moshe Asher said in September. He called on Israelis to come forward voluntarily and declare their unreported assets to the authority, before tax treaties providing for the international sharing of such information take effect.
The Common Reporting Standard will provide a framework through which financial institutions, including banks and insurance companies, will follow set procedures in identifying financial accounts maintained at the institutions. The information will then be shared with relevant government tax agencies. The Israel Tax Authority will automatically transmit the information once a year.
Implementation of the Common Reporting Standard will take time in Israel, because it requires amendments to current legislation. It will also not be retroactive. Between now and when it comes into effect, it is reasonable to assume that some holders of undeclared assets will come clean, while others will move their money to new tax havens.
The exchange of information required by the OECD’s Common Reporting Standard is somewhat different from the FATCA standard required by American authorities, Finance Ministry officials noted. FATCA will require financial institutions in Israel to identify assets of both U.S. citizens in Israel and residents of the United States with assets here, while the OECD mechanism relates only to a person’s place of residence and not nationality. It is expected to rely on a declaration by the account holder, but banks will be required to make their own independent inquiries to verify the reliability of the declaration.