Last week, the Israeli Tax Authority announced that Israel has reached an agreement “in substance” with the U.S. Treasury to adopt the U.S. Model 1 inter-governmental agreement designed to implement the provisions of the U.S. Foreign Account Tax Compliance Act (“FATCA”) with respect to Israeli financial institutions.
Generally, the goal of FATCA is to collect information on U.S. taxpayers in order to prevent U.S. tax evasion by US taxpayers. Under FATCA, a 30% U.S. withholding tax is imposed on certain US source payments made to foreign financial institutions, unless such foreign financial institution complies with FATCA, which generally means to identify all US account holders and provide such information to the IRS. The term "foreign financial institution" is defined very broadly and includes banks, broker-dealers, entities conducting custodial businesses, certain investment vehicles, and certain insurance companies.
In order to facilitate the compliance of non-U.S. foreign financial institutions with the provisions of FATCA, the United States enters into inter-governmental agreements with other countries. Currently, the United States signed about 30 such inter-governmental agreements and about another 30 countries have reached an agreement in substance to adopt such inter-governmental agreements.
As part of the effort to facilitate the compliance of Israeli financial institutions with FATCA and in anticipation of signing the inter-governmental agreement with the United States, there is currently a proposal to amend the Israeli Income Tax Ordinance in a way that will authorize the Minister of Finance, with the approval of the Finance Committee, to promulgate regulations (which have not yet been published) that will provide provisions on how financial institutions will identify account holders and the method in which such information on the accounts holders shall be transmitted to the Israeli Tax Authority. It should be noted that the above regulations may be used by the Israeli Tax Authority in order also to identify non-U.S. account holders for the purpose of automatic exchange of information with other OECD countries.
In addition, there is another bill to amend the Israeli Income Tax Ordinance by adding a new chapter that will allow the Israeli Tax Authority not only to obtain the required information but also, under certain limitations, to exchange such information under international agreements that Israel has entered into, such as the Model 1 inter-governmental agreement that will be signed with the United States. We are following the progress of these proposals as well as other Israeli FATCA related developments and will keep you updated of future developments.