Israel Enters a FATCA Pact, Concludes Terms of the IGA
Monday, May 5 saw the Finance Ministry of Israel confirm that the US and the Jewish-majority state had concluded the text of an intergovernmental agreement (IGA) for the implementation of the Foreign Account Tax Compliance Act (FATCA).
Earlier, with Israel and the US reaching an agreement over sharing of tax information, on Thursday, May 1, Israel had become the latest nation to have entered a FATCA pact with Uncle Sam.
Foreign Account Tax Compliance Act of 2010 – The backdrop
Many American taxpayers are known to use foreign accounts for dodging tax obligations. After an infamous scandal involving US citizens hiding their money in Swiss banks, Congress enacted the FATCA in 2010 to combat the non-compliance of such citizens. The Act requires overseas insurers, investment funds, banks and other foreign financial institutions (FFIs) to divulge information about accounts held by US citizens.
These include the accounts that have over $50,000 to the nation’s Internal Revenue Service or accounts of entities that are not US Taxpayers, but in which US taxpayers hold a substantial amount of ownership interest. Prepared by the US Treasury department, the Act is set to be implemented from July 1, after two delays and four years of preparations.
Penalties for FFIs that do not comply by the information-sharing arrangement, include a 30 percent tax cut on the income generated out of US investment. Non-complaint FFIs also face the risk of being completely barred from the trading in any US capital market.
Israel becomes the latest nation to enter a FATCA pact with the US
After forming FATCA pacts with 57 odd countries of the world including the Isle of Man and India, the US Treasury finally struck a deal with Israel, after the two nations negotiated the terms of the Model IGA drafted by the US for Israel.
Under the pact, FFIs from Israel are required to present information about such accounts to the Israel Tax Authority who in turn, would exchange the information with the office of the US Treasury. Following Israel’s request for a reciprocal exchange, the IGA will allow the exchange of information about US accounts held by Israelis.
Previously, a former vice president of Tel Aviv, Israel-based bank, Shokrollah Baravarian was charged with criminal conspiracy. Baravarian apparently helped US citizens set up secret accounts in the bank to hide money from the IRS. Following the conclusion of the text of IGA, both nations will now have information about the financial activity of their taxpayers in different nations.