The Israel Tax Authority & The Banking Supervision Department are Assisting the Diamond Industry

On January 21, 2018, the Director of the Israel Tax Authority (ITA), Mr. Moshe Asher, together with the Supervisor of Banks, Dr. Hedva Bar, sent a letter of clarification to the banks regarding the opening of accounts and granting credit to diamond merchants, enabling the banks to rely on a submission of a voluntary disclosure request as a way of reducing compliance risk with Israeli tax laws.

In recent years, the diamond industry has encountered difficulties in dealing with the banking system, because of a global deterioration in the diamond industry, an increase in compliance risks in general, and in the diamond industry in particular. This was reflected by the fact that some banks declined giving credit to the diamond industry while others completely stopped financing the industry altogether.

The letter was published following recent measures taken by the ITA in collaboration with the Diamond Exchange, to regulate the tax matters of diamond merchants when facing Israeli authorities. These measures include the opening of the tax authorities' voluntary disclosure process to diamond merchants, the regulation through legislation of how inventory is to be managed in the diamond merchants’ books, and how end-of-year closing inventory is to be reported for tax purposes.

These steps are expected to reduce the risks Israeli banks face when managing such accounts in terms of compliance with Israel's tax laws, and this may also make it easier for diamond merchants to obtain credit from the banks.

The letter states that in 2018, the banks can rely on the ITA’s approval of a voluntary disclosure submission by the diamond merchant for the purpose of managing their risks, even before the voluntary disclosure process is completed (as long as the request is not rejected). According to the ITA and the Supervisor of Banks, this will contribute to the ability of diamond merchants to manage bank accounts in Israel.

As mentioned in a previous blog, the ITA published a new "voluntary disclosure procedure" back in December 2017. The voluntary disclosure of the unreported income needs to be made in good faith and before the ITA has started to investigate the applicant.

Taxpayers who are accepted into the procedure will still have to pay all taxes due (including interest, linkage and possible civil fines as determined by the agent), and in return the ITA, with the approval of the Criminal State Attorney, will not recommend criminal prosecution against these taxpayers. Consequently, the ITA is highly recommending utilizing this “window of opportunity” to come forward before an investigation is initiated against taxpayers.

The new procedure will be in effect until the end of 2019. Similar to the previous procedure, it also includes shortened and anonymous tracks. It should be noted that the anonymous track will be available until December 31, 2018.

Important to note that although the ITA has not stated so specifically in the program’s regulations, it has developed an unwritten practice whereas it will impose a penalty between 10%-15% on the value or balance of the capital at the beginning of the reporting period of the voluntary disclosure period, in addition to the tax imposed.

In the event that the taxpayer can provide satisfactory documentation to demonstrate that the source of the unreported capital is exempt from tax, (i.e. the source of the money is from out of Israel, or tax on the source had been paid per the Israeli law), this penalty will not be imposed.

The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances. Some of this article is a loose translation from a Hebrew press release that was published by the Israeli Tax Authorities, together with the press release published by the Bank of Israel.

#VoluntaryDisclosure #diamonds #banks #Israel #IsraelTaxAuthority


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