On May 1st the Israeli Finance Ministry agreed to provide the American Internal Revenue Service all information on the bank accounts held by American citizens in Israel.
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In 2010 the United States Congress passed a strict new law, the Foreign Account Tax Compliance Act (FATCA), in order to fight tax evasions by its citizens who deposit money in overseas bank accounts. The act requires that countries, such as Israel, inform the US Internal Revenue Service on all transactions enacted with their banks, investment funds and insurers by Americans or have their firms sanctioned with a 30% withholding tax on their U.S. investments. It will go into effect on July 1st of this year.
FACTA was passed by the American government to deal with the problem of its citizens hiding money in off shore accounts, or in countries like Switzerland, in order to evade taxes.
The U.S. Treasury Department has announced that it reached an agreement with the Israeli government for its compliance with the terms of FATCA. Under the terms of the deal, Israel will inform the IRS of any accounts or investments held in Israel by Americans that are more than $50, 000 in value.
Israel is now one of 57 countries in the world to have entered into such an arrangement with the United States.
The deputy supervisor for state revenue at the Israel Tax Authority, Frieda Israel, headed the negotiating team for the accord. She stated, “ The agreement in substance provides Israel the status of a country with a signed agreement with the United States. It will make it easier for the necessary financial institutions to provide the information on American accounts in Israel, ”
Israeli banks and investment firms will now report all information on U.S. Citizens’ and permanent residents’ accounts to their local tax authorities, which will in turn send the information on to the IRS. The agreement between the two countries is only a “handshake” deal at this point and will be formalized by the end of 2014.
American citizens living in Israel are required to pay income tax in the US on all income earned in Israel above $97, 600 a year. While this may seem like a large some to most Israelis, a tax return must still be submitted on any and all income earned in Israel, even if no taxes are owed. But the $97, 000 figure comes only after deducting Israeli income tax.
Failure by American citizens living in Israel to file the proper forms with the IRS can result in a fine of up to $10, 000.
Dave Wolf, a partner at the accounting firm Hacohen Wolf which handles US tax returns for Americans living in Israel told Israel’s daily newspaper Haaretz, “Israel has been a tax haven for many years; we don’t have good reputation, up there between Switzerland and Hong Kong, That is probably one of the reasons Israel was eager to sign — we want to be part of the big boys club, part of the OECD (Organization for Economic Co-operation and Development).”
FACTA could also effect Israeli citizens who live in the US, such as the many Israeli entrepreneurs and businessman there. Foreign citizens working legally in America, whether as residents or under a work visa, must pay American income tax on their wages.. The IRS will now know if such people are hiding income in Israeli banks.
Compliance with FACTA has had a negative impact on Israeli banks. Globes has reported that fear of the act has already led to a divestment of up to $5 billion from Israeli banks by American citizens.
Currently only Israel must provide the US with information on its citizens, but eventually America will reciprocate and give Israel information on the banking of Israelis in the US.