FATCA appeal rejected by Israeli Supreme Court
Israeli High Court allows FATCA reporting to proceed
TAX ALERT |
UPDATE 9/14/2016: In a Sept. 12, 2016, hearing, the Israeli High Court of Justice rejected a challenge to the implementation of the U.S Foreign Account Tax Compliance Act (FATCA), lifting the recently issued interim order preventing information exchanges under FATCA between the Israeli government and the U.S. Treasury.
Enacted in 2010 to target non-compliance by U.S. taxpayers holding foreign accounts, FATCA requires foreign financial institutions to identify and report certain information regarding any U.S. account holders, or subject themselves to a 30 percent gross basis withholding tax on certain U.S.-source income. Taxpayers can comply with the FATCA reporting requirements in one of two ways: (1) enter into agreements directly with the IRS, or (2) follow the requirements of an inter-governmental agreement (IGA) with the United States, as Israel did. The IGA entered into by Israel allows Israel’s financial institutions to submit the required FATCA reporting information directly to the Israel Tax Authority, which would automatically exchange the information with the U.S. Treasury.
The Israeli–U.S. FATCA information exchanges were halted, however, as the result of a petition accepted by the Israeli High Court on Aug. 31, 2016. The decision to accept this petition temporarily suspended the transmission of information between Israel and the United States, pending a hearing on the petition, just one day before information exchanges were set to begin on Sept. 1, 2016.
During the hearing, which took place on Sept. 12, 2016, the High Court rejected the challenge to Israel’s FATCA implementation, which was brought by a group of U.S. persons resident in Israel, ending the temporary block on information sharing between the Israeli government and the U.S. Treasury. The High Court stated that it would push the implementation date of the agreement back to Sept. 30, 2016, the date originally agreed upon by the Israeli Parliament, giving U.S. citizens 30 days to object to their inclusion in the FATCA information exchange program.
The Israeli High Court’s decision to reject this taxpayer challenge likely puts an end to any further legal opposition to Israel’s FATCA implementation, eliminating the need for alternative FATCA compliance plans to be in place by Jan. 1, 2016 (see Intergovernmental agreements must be in force by Jan.1, 2017) to avoid having the IRS treat Israel as a jurisdiction without an IGA in place.
ORIGINAL 9/7/2016: The High Court of Justice of Israel has prohibited the Israeli government from sharing the financial information of Israeli citizens with the United States until Sept. 30, 2016, the date that legislation authorizing information sharing under Foreign Account Tax Compliance Act (FATCA) has come into effect. In addition, the court has scheduled a hearing on Sept. 12, 2016, to rule on the validity of the law itself.
Under U.S. FATCA rules, non-U.S. financial institutions must provide account information to the IRS or face a 30 percent gross basis withholding tax on certain U.S.-source income amounts. The IRS has negotiated intergovernmental agreements (IGA) with foreign countries, including Israel, that allow non-U.S. financial institutions to provide account holder information to their home country government, which will then transmit such information to the IRS. Israel has signed an IGA with the United States, and Israel recently approved regulations that would allow the IGA to go into effect. However, the ruling from the Israel High Court of Justice forbids the Israeli government from delivering account information to the IRS. The plaintiffs in this case argue that disclosure rules violate the Israeli constitution because they are overbroad—they require disclosure of information on accounts that would not be reportable under the U.S. FATCA rules. While the outcome of this case is unclear, foreign courts have rarely questioned the validity of an IGA or of internal rules designed to comply with FATCA, so this case is quite unusual. If plaintiffs are successful, Israeli financial institutions may be required to report a reduced quantum of account information, easing their FATCA compliance burdens.
In addition, the IRS has previously indicated that jurisdictions that do not bring their FATCA agreements into force by Jan. 1, 2017, risk being treated as if no IGA is in force at all. See our recent article, Intergovernmental agreements must be in force by Jan. 1, 2017. If the High Court of Justice case prevents the Israeli IGA from coming into effect, , Israeli financial institutions may need to have an alternative FATCA compliance plan in place on Jan. 1, 2017, or feel the sting of a 30 percent withholding tax on their U.S. source income.