Voluntary Disclosure - taxation on capital as part of the Voluntary Disclosure Procedure by the Tax Authority is legitimate - 10.11.2019

Over the last decade many Israeli residents have sought to settle previously unreported accounts of foreign-held assets and the income generated by them with the Tax Authority. This was typically performed by a formal petition to the Tax Authority via the Voluntary Disclosure Procedure. The procedure has changed over the years, has been extended periodically, and even allowed for submission of anonymous requests and negotiations until an arrangement was reached. Our firm has been involved in many of these petitions and arrangements and has witnessed the changes that have taken place over the years regarding a significant issue in these arrangements, namely – should taxation apply to the “capital”, and if so, at what tax rate.

The subject of taxation on capital has been addressed in a July 14, 2019 court ruling in the case of Avner Nukrai (Class Action Case 16-05-5356), where the petition to recognize the case as a class action suit was denied. As the basis of the claim, the claimant maintained that taxation on years where the statute of limitations has expired should not apply; that is, those tax years that preceded the ten years before reporting.

As to the statute of limitations, the court ruling included the following:

• Don’t mix apples and oranges – that is, you cannot infer from a statute of limitations on the criminal offense of tax evasion on incomegenerated over ten years ago, to a statute of limitations on a civil matter (tax collection).

• Despite this, however, the Tax Authority is not authorized to collect taxes without a time limit; there are limitations of reasonability and conditions of adherence to the rules of administrative law. The judge states that the taxpayer has already received consideration in the form of immunity from criminal trial, thus the demand to also tax income generated more than ten years prior is a reasonable one.

• Nor shall the statute of limitation apply to the case of someone who submitted a tax return but failed to include a significant portion of his income in it.

The judge claims that in accepting the claim while retaining the immunity from criminal charges, there is an egregious violation (emphasis in the original!) of the delicate balance at the foundation of the Voluntary Disclosure Procedure, and this claim displays a lack of good faith.

We believe that there’s good news in this ruling, despite denial of the request; specifically the possibility of taxation of income for the years in which the statute of limitations has expired. What follows from the ruling is that while the Voluntary Disclosure process grants immunity from criminal charges, taxation of income from more than ten years prior is legitimate. We believe this is not the case in standard civil tax assessment procedures; as long as the taxpayer was not convicted of a crime or paid a forfeiture, he will not receive a tax assessment and the Tax Authority will not be authorized to tax him on the years preceding the statute of limitations. This would certainly apply to cases where non – reporting on past income was due to error or was not a result of premeditated planning and intent.

We’d like to take this opportunity to remind you that the current Voluntary Disclosure Program will expire at the end of 2019 and the Tax Authority has already announced that it does not anticipate an extension or a renewed program.