Israel’s Knesset gives green light to FATCA
Israel’s Knesset has paved the way for legislation that will obliged financial entities in that country to disclose information about their American citizen clients to the US Internal Revenue Service, in accordance with FATCA.
The Knesset Finance Committee’s approval of a bill that will establish in Israeli law the provisions of the US Foreign Account Tax Compliance Act (FATCA) came on Monday, following “weeks” of discussion, Israeli media organisations are reporting.
The same committee must now approve the specific regulations required to technically implement the legislation, the media reports say, with the bill expected to take effect after the regulations are published next week.
The new bill requires banks and other financial institutions to disclose information about their US citizens clients who currently live in Israel to the Israel Tax Authority, which then forwards it to the IRS.
Around 300,000 to 400,000 US citizens are estimated to live in Israel, which represents roughly 4% to 5% of the total population, according to Marc Zell, a lawyer with Zell, Aron & Co, in Jerusalem, who is also co-chairman of the Israeli branch of Republicans Overseas. Unknown, for now, is how many green card holders – also considered Americans for FATCA purposes – currently live there.
Some 113 other countries have already agreed to an arrangement similar to the one Israel is agreeing to, which enables the financial institutions in these countries and their clients to abide by the requirements of FATCA. Those financial institutions that fail to comply risk such potential penalties as a 30% withholding tax and exclusion from US markets.
According to Globes, an online Israeli business news website, Israeli government negotiators managed “to lighten the financial sanctions imposed on financial institutions failing for technical reasons to meet all the complicated requirement under the law”, imposing a lower financial sanction on non-compliant institutions than the original bill had originally stipulated.
“It was also decided that gamachim (private institutions providing interest-free loans to individuals under Jewish law) would be classified as public benefit companies under the Companies Law, enabling them to continue operating without the FATCA provisions applying to them, because the bill concerns [entities] classified as financial institutions,” the Globes report noted.
FATCA was signed into law by President Obama in the wake of the global financial crisis, and a scandal involving a Swiss bank that was found to have numerous significant and undeclared American bank accounts. It has been widely criticised by many expatriate Americans, non-US banks and libertarians.
As reported, it has also put the US in an awkward position relative to many of its G20 allies and other countries, as it has resisted signing up to a global automatic information disclosure scheme, known as the Common Reporting Standard (CRS), which is currently being promoted by the OECD. The CRS would require US financial institutions to provide tax-relevant financial information on the citizens of other CRS signatory countries to these countries’ tax authorities in much the same way that FATCA requires other nations’ financial institutions to forward data on their resident Americans.
Israel set for CRS
Israel, as it happens, is among the nations that have already signed up to the CRS, as it’s keen “to be seen as a good global citizen” according to Richard LeVine, a Connecticut-based special counsel with the London-based Withers LLP international law firm, who specialises on cross-border tax-planning and related issues, for American high-net-worth clients.
As for the FATCA agreement between Israel and the US, LeVine says it isn’t particularly unusual, apart from the fact that even though Israel itself is quite small in terms of population and size by international standards it is nevertheless “an important country” in terms of FATCA.
This is because of the extensive links between Israel’s citizens and businesses and their US counterparts, and as a result, “a lot of flow back and forth both in terms of individuals and in terms of investment”, he explains.
“So there are likely to be people with [bank] accounts, real estate and family members in both countries.
“It definitely punches above its weight in terms of its importance [with respect to FATCA].”
To see a list of all the countries that have agreed to help the US to enforce FATCA on the IRS’s website, click here.