In contrary to the world "trend" to combat hidden bank accounts and tax-havens entities, a contradicting policy may be viewed in Israel, which recently amended its tax laws. Currently, Israel provides New Immigrants and Returning Residents with extreme tax benefits, including a 10-year tax exemption on foreign sourced income and gains, as well as no reporting requirements on such income or gains.
In recent years, and especially in 2009, the pressure of the developed countries on low tax jurisdictions has been accelerating. Hidden bank accounts and "sheltered" companies are intensively targeted by the OECD1 at the multilateral level, by each of its Member Countries and specifically by the United States (U.S.) through its Ministry of Justice and the Inland Revenue Service (IRS). The OECD Member Countries include most of the European Union Member States as well as other major economies e.g., Japan, the U.S., Australia and Korea.
The OECD has been closely monitoring the concentration of financial activities and funds in off-shore jurisdictions, as well as in low tax countries such as Austria, Luxemburg and Switzerland. There is a special interest in activities and assets of net wealth individuals and their links to highly favorable financial centers.
During the last year, both the OECD and the U.S. took several unconventional and extreme steps in order to minimize the world-wide tax evasion, as they observe it. These initiatives took the world's attention mainly in light of the highly aggressive steps of the IRS towards the Swiss financial giant UBS (and the precedence of disclosing hundreds of names of U.S. tax payers while thousands more may also be provided to the IRS).
Actually, Israel was also influenced by this global trend against tax-havens and tax avoidance in its early stages: in 2003 the Israeli tax system was shifted to a new tax base - the imposition of income tax on a worldwide basis. Additionally, Israeli has introduced Controlled Foreign Corporation (CFC) rules, worldwide Vocational Taxation provisions, extensive reporting requirements and a revolutionary trust law reform, all of which intend to significantly increase tax collection while combating tax evasion.
The OECD's Initiatives and Policies
On September 1, 2009 the OECD has published another report regarding tax-havens (Overview of the OECD's work on Countering International Tax Evasion) that provides a global review of the tax evasion through low tax jurisdictions. According to the OECD's formal policy, this phenomenon - according to which individuals and entities have the possibility to divert significant amounts of fund to hidden shelters and, as a result, evade their tax liabilities in the "legitimate" countries - is very hazardous since it may potentially destabilize global markets as well as the sovereignty of leading economies.
As a part of the 2009 high awareness to this issue, the OECD has published a detailed jurisdiction based report in relation to the implementation of the acceptable international rules on tax transparency and the bilateral exchange of information between countries. This report refers to 84 jurisdictions, some of which are tax-havens by definition that decided to "give-up" and cooperate with the OECD and the U.S. These tax-havens are, therefore, parties to a continuing dialog with the OECD.
This monitoring of the disclosure, exchange of information and cooperation processes is also in line with policies of the G-8 and G-20, as published in the last year.
The standards, which are imposed by the OECD and are adopted through bilateral agreements, include the following principles:
- Disclosure of relevant information for the enforcement of rules of other contracting states;
- The removal of barriers related to bank secrecy or domestic interests;
- Accessibility of relevant information; while all the above is performed -
- In light of the rights of the taxpayer for the protection of his basic rights.
As a result, it appears that the option to use tax-havens through tax planning in order to hide funds / entities in "exotic" jurisdictions is gradually and rapidly diminishing. Main financial centers with significantly strong economies and political powers are among the "cooperating" countries. A very prominent example would be of Switzerland, Luxemburg and Austria.
The current "harvest" of Exchange of Information agreements is more than 100 agreements (since the year 2000), 40% of them were signed in the last year. It should be noted that "classic" tax-havens policies are now in line with the OECD and the U.S. disclosure guidelines. This includes the British Virgin Islands (BVI), Bermuda, Cayman Islands, Jersey, Guernsey, the Isle of Man, the Netherland-Antilles as well as Andorra, Monaco and Lichtenstein (the latter agreed to pull down from a former uncooperative positions, following an intense IRS pressure, and has also been cooperating with the UK tax authorities (HMRC).
The IRS's Initiatives and Policies
While examining the U.S. efforts to limit the use of tax-havens by its taxpayers, one should not ignore the global effect of the UBS case (and other leading financial institutions) on the tax-havens industry. According to the U.S. Senate report2 it is estimated that these U.S. annual losses of tax revenues reach an imaginary amount of 100 billion Dollars.
This assumption was one of the main motives of the IRS (which was supported by the Obama administration policy) to closely cooperate with the OECD and its Member Countries in order to combat this off-shore mammoth industry. One of the highest peaks of this initiative was the actual arrest of certain high level UBS bankers on U.S. soil and the "give-away" by UBS of more than 500 hundreds names of U.S. taxpayers. In addition, UBS had to pay fines of 780 million U.S. Dollars.
The coordination between the OECD countries led to these strict steps against UBS: according to recent updates an agreement was finally concluded between the U.S. and Switzerland, according to which at least 4,450 names of UBS's U.S. clients, which are U.S. taxpayers, will be handed to the IRS. This step will be performed under a U.S. - Switzerland tax treaty provision on exchange of information (an amending treaty protocol will come into force shortly).
Other financial institutions, such as Credit Swiss and HSBC are also negotiating a settlement with the U.S.
It is estimated that the U.S. strict and intolerant policy towards "off-shores" will be backed by a new legal reform, following the U.S. Senate legislation initiative (the Baucus Initiative).
The Opposite Path of the Israeli Tax Legislation: Extreme Israeli Tax Incentives
Considering all the above and the global war against off-shore financial activities, the Israeli new Tax Amendment 168 appears to be revolutionary and contradictive, as it actually establishes a "limited tax-haven" under Israel's domestic law through highly unusual tax benefits provided to individual who immigrate to Israel, in case certain conditions are met.
Under this revolutionary amendment, a 10-year full tax exemption with no reporting requirement applies to New Immigrants and Returning residents (only to eligible individuals, as defined under the Income Tax Ordinance). Under another and recent law amendment (the Economic Efficiency Law, 2009), the Finance Minister was provided with an authority to double the said 10-year period to 20 years - through regulations (that were not issued yet), provided that a "significant investment" is performed in Israel by an illegible individual. No definition of the required investment amount was provided.
It is, however, unclear how the 168 Amendment and the new revolutionary tax benefits are in line with the tax treaties provisions that Israel has concluded with other countries, that impose certain obligations to exchange information / disclose information. In addition, Israel is in the process of joining the OECD, while its policies (and mainly Amendment 168) are not fully in line with the core goals and policies of the OECD.
Taking into account the political and tax implications of Amendment 168, it appears that Israel provides net wealth individuals with a unique opportunity to transfer funds from off-shore jurisdictions and financial centers into Israel, while enjoying the "protection" of a respectable country, which is not classified as a low tax jurisdiction and surely not as a tax-haven. This Israeli opportunity seems to be a rare solution in the current global reality that demonstrates an extensive pressure on tax-havens and undisclosed accounts.
These benefits are planned to be amended, in a way that an eligible individual may be required to report of his foreign income and assets. However, at this stage (July 2013) this is only the wording of a Draft Law and the final phrasing of the law will be published after the legislation process is complete.