On July 19, 2018, the Israel Tax Authority (ITA) issued technical guidance, dated March 11, 2018, for financial institutions (FIs) on application of the Common Reporting Standard (CRS) for the automatic exchange of financial account information with participating countries. The guidance is in draft format, and is subject to change by the ITA.
Editor’s Note: Information on Israel’s implementation of the CRS is discussed in the Background section below. Israel has committed to begin automatic exchange of information under the CRS in September 2018.
The ITA guidance discusses how to access the ITA portal for submitting covered financial account information. FIs that are already registered for U.S. Foreign Account Tax Compliance Act (FATCA) purposes should update their information on the ITA portal to include their CRS registration.
FIs must submit financial account information to the ITA in XML format, according to the OECD format and user guide. On July 11, 2016, the OECD released its standardized information technology (IT) format, which provides structured feedback on exchanged CRS information – the CRS Status Message XML Schema—as well as the related user guide.
From an IT perspective, jurisdictions will rely on the CRS XML Schema for exchanging information and, in many instances, to receive information from their FIs. The CRS Status Message XML Schema allows Competent Authorities that have received CRS information through the CRS XML Schema to report back as to whether the file received contained any file or record errors. Where file errors are discovered, this will generally mean that the receiving Competent Authority is unable to open and use the file. Record errors address key issues of data quality of the CRS information received, but do not technically impede the Competent Authority from opening and using the file.
According to the ITA guidance, the ITA will inform Israeli FIs of any errors in the FIs’ CRS submissions, whether found by the ITA or a jurisdiction with which the ITA automatically exchanges the covered financial information.
On July 15, 2014, the OECD Council approved the Standard for Automatic Exchange of Financial Account Information in Tax Matters (“the Standard”), which consists of four core parts:
- A model Competent Authority Agreement (CAA).
- The CRS.
- The Commentaries on the CAA and the CRS.
- The CRS XML Schema User Guide.
The CRS requires jurisdictions to obtain information from their FIs and annually exchange that information automatically with other jurisdictions. It provides information on the financial account information to be exchanged, the FIs required to report, the different types of accounts and taxpayers covered, and common due diligence procedures that FIs must to follow.
The CRS applies to FIs, such as custodial institutions, depositary institutions, investment entities, and specified insurance companies, with specific exceptions. Reportable financial information with respect to reportable accounts includes interest, dividends, account balance or value, income from certain insurance products, and sales proceeds from financial assets. Reportable accounts are held by individuals and entities, including trusts and foundations, and the CRS requires jurisdictions to look through passive entities to report on the relevant controlling persons. The due diligence procedures that reporting FIs perform for the identification of reportable accounts distinguish between individual accounts and entity accounts. They also distinguish between pre-existing and new accounts.
On May 12, 2016, Israel signed the OECD Multilateral Competent Authority Agreement (MCAA), implementing the G20’s and OECD’s Standard for the Automatic Exchange of Financial Information in Tax Matters.
On July 12, 2016, the Israeli Knesset (unicameral national legislature) passed Amendment No. 227 to the Income Tax Ordinance to implement the MCAA to allow the ITA to exchange financial account information with other signatories of the MCAA, to the extent the foreign jurisdictions commit to keeping the tax information confidential. In cases of national security, Israel will not provide the covered tax information to other jurisdictions.
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