New banking Convention

Last ten years, considerable efforts have been undertaken, particular by the European Union and the OECD, in order to promote international cooperation for a better implementation of national tax laws. It is in this context that the OECD Convention on mutual administrative assistance in tax matters has been developed.

So far, Israel is the only Member State of the OECD at not having signed this Convention. As a result, many countries curb their collaboration with the Israeli tax authorities struggling to obtain information regarding its taxpayer suspected escape tax in Israel, and practicing tax evasion.

 

The adoption of the Convention has thus become a priority, and it goes through the adaptation of the Israeli tax law. It is made, Since the 19 November 2015 has passed a law of rectification of the fiscal law.

The adoption of this law enables the Israeli tax authority to provide on its own initiative or on request, a State signatory to the Convention, information about Israeli or foreign citizens.

So far the exchange of information was possible for countries having signed with Israel a bilateral tax agreement avoiding double taxation. This is the case of the France, the Belgium and the Canada. Nevertheless, This practice, based on article 26 the bilateral Convention, was infrequent and concerned a few countries.

The OECD Convention on mutual administrative assistance in tax matters determines the technical arrangements for transfer of information between the tax authorities of the different countries.

The law passed the 19 precise last November also, that the IRS may take all necessary measures to gather the information requested, in accordance with usual practices at its disposal. Therefore, the Israeli tax authorities will be able to search for information in its own databases, in the same way that it practised during tax audits of its own residents.

The effectiveness of the measures adopted is however mitigated by many of the requirements laid down by the Act :

1. The Israeli tax authority must be satisfied that the information requested or transferred on its own initiative is essential to the application of the tax legislation of the country concerned.

Take the example of a french taxpayer suspected by the French tax authorities to hold a bank account in Israel. Proof of the existence of such an account would allow the latter to increase the tax base, and possibly make this same eligible taxpayer to ISF.

On the other hand, without concrete evidence on the existence of this account and the amounts contained therein, the french tax authorities would be unable to demand and to implement recovery tax it considers to be of. It should be noted that, to make a request for information to the Israeli tax authority, the french tax authorities must hold evidence concerning the existence of account (statements, information provided by a third party…)

2. The Israeli tax authority would have been permitted to use such information for the purposes of its own legislation. Israel gets its own information by several means : information on the internet such as sales and purchases charged by taxpayers on the internet, the information provided by anonymous persons or not, statements by its own taxpayers, surprise business visits, the information collected on court order (the banks for example), tax audits.

3. The Treaty linking Israel to the State concerned by such information (It was a bilateral treaty or though the Convention) requires parties to respect for privacy and data protection. For example, the France is equipped with a legal device requiring the confidentiality of tax information (Article L 103 the book of tax Procedures). This privacy violation is sanctioned by article 226-13 of the Criminal Code.

4. The country concerned undertakes not to transmit the information to a third country or to any person to use such information for any purpose other than the application of tax legislation. It should be noted that article 22 (4) of the OECD Convention on mutual administrative assistance in tax matters, provides that “the information provided by one party to another party may be sent by the Commission to a third party subject to prior authorization by the competent authority of the first part”.

5. The taxpayer about which are exchanged information will be notified by the Israeli tax authority 14 days before the transmission of the information is resident Israeli, unless the State concerned objects to it specifically.

6. Israel is entitled to refuse the transmission of certain information for national security reasons or if the co-contractor State concerned does not meet the provisions of the bilateral treaty or the Convention by virtue of / which are exchanged information.

Finally, and even if the current law not address it, should examine the question of the automatic exchange of information.

Indeed, Since 2012, the interest has focused more and more on the advantages of the automatic exchange of information. The automatic exchange of information with the systematic communication, at regular intervals, of ‘blocks’ of various categories of income-related information (dividends, interests etc.), by the country of the source of the income in the country of residence of the taxpayer.

The OECD has recently approved a standard for the automatic exchange of information in tax matters, and the principle of the automatic exchange was accepted and incorporated into the OECD Convention on mutual administrative assistance in tax matters (article 6).

Furthermore, by a statement of 27 October 2014, the Israeli Ministry of Finance expressed support to the principle of automatic information exchange. It should be noted that this form of exchange of information requires a preliminary agreement between the competent authorities on the procedure to be adopted and the type of information exchanged.

For the France-Israel relations, Israel and the Belgium, The Switzerland/Israel or Israel and the Canada, No preliminary agreement between tax administrations adopted.

At the present time, more than 40 States have agreed on a specific timetable leading to the first automatic in exchanges 2017. Israel is not a party and has deliberately avoided the subject in his new Act. Many parliamentarians are fiercely opposed to the automatic information exchange as it would also affect Israeli citizens.

If the automatic cooperation noose tightens, still many steps to take to find an actual exchange of data. However, Israeli banks, anxious to protect themselves from the risk of complicity in tax evasion, impose on their customers many administrative constraints for a future obligation to “bulk” data transmissions.

Michael Jarod, Lawyer at the bar of Israel

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