The Israeli Tax Authority (ITA) launched a new temporary voluntary disclosure procedure (VDP) on 15 November. Israeli residents have until 30 June 2012 to report previously undisclosed income on foreign (non-Israeli) assets. This action will confer immunity from criminal proceedings, and some relief regarding fines, interest and indexation. This is an improvement over the older fixed Israeli VDP dating back to 10 April 2005, which will partly apply until 30 June 2012 and will fully apply again after that date.

According to the ITA, cases where the temporary VDP will apply include:

• unreported income from foreign assets received by inheritance or gift from a foreign resident
• unreported income from foreign assets acquired with money derived from income generated in Israel or abroad on which tax was paid or no tax was due in Israel; and
• unreported income from foreign assets on which the liability to tax arose since the 2003 tax year, following the Israeli tax reform of 2003, which made Israeli residents taxable on worldwide income instead of Israeli-source income.

The temporary procedure does not apply to assets and income derived from a ‘crime’ under the Penal Law (defined in s24 as an offence carrying a punishment of more than three years), or for applications made following or in parallel to an investigation or examination by a State authority, according to the older fixed VDP.

The panel of tax officials led by the ITA legal advisor will review applications for the temporary VDP, but it won’t deal with those that do not meet the criteria. Nevertheless, according to the ITA Circular, ‘no use will be made in the criminal and civil arena with the information included in the application’.

‘The tax according to the assessment will not bear interest or fines’

Applications meeting the criteria will be confirmed by the panel and the applicant will be given immunity from criminal sanctions under the tax laws within the ambit of the ITA. And the panel will issue a civil tax assessment, which may be by agreement with the applicant. The tax according to the assessment will not bear interest or fines. Additionally, the panel may grant relief regarding indexation (for inflation) of the tax, and may even cancel the indexation.

In conclusion, the temporary VDP is worth considering in applicable cases if an Israeli resident has a tax skeleton in the closet. The procedure not only offers immunity from criminal sanctions, but also immunity from interest and penalties. Any such application should be made by 30 June 2012 after checking things out.

• It is unclear whether anonymous applications can initially be filed.
• Presumably, as this will be a civil procedure, the panel’s conclusions will not be published.
• Difficulty may arise in cases involving unreported income used to buy assets in Israel rather than abroad.
• If a case does not meet the criteria because an investigation or an examination is under way, will the Israeli Tax Authority be precluded from using information included in the voluntary disclosure procedure (VDP) application? It appears so.
• Restricting the temporary VDP to Israeli-resident applicants will cause problems, in particular for trustees of trusts that are taxable in Israel, e.g. if the settlor is or was an Israeli resident. The 2006 tax regime deems the trustee ‘assessable and chargeable to tax’ unless the trustee and the settlor, beneficiary or beneficiaries agree otherwise. Is this discriminatory under Israel’s tax treaties with 50 other countries? It could be under treaties with the US and Canada, but most others don’t yet address trusts, resulting in uncertainty. Specialist Israeli advice should be sought.