Israel
This report analyses the implementation of the AEOI Standard in Israel with respect to the requirements of the AEOI Terms of Reference. It assesses both the legal frameworks put in place to implement the AEOI Standard and the effectiveness of the implementation of the AEOI Standard in practice.
The methodology used for the peer reviews and that therefore underpins this report is outlined in Chapter 2.
Overall findings
AEOI legal framework
Israel’s legal framework implementing the AEOI Standard is not in place in accordance with the requirements of the AEOI Terms of Reference. While Israel’s international legal framework to exchange the information with all of Israel’s Interested Appropriate Partners (CR2) is consistent with the requirements, the domestic legislative framework requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (CR1) has significant deficiencies in areas that are fundamental to the proper functioning of the AEOI Standard. More specifically, the deficiencies relate to the scope of Reporting Financial Institutions, the scope of Financial Accounts, the due diligence procedures to identify Reportable Accounts, and to the enforcement framework.
Effectiveness of AEOI in practice
Israel’s implementation of the AEOI Standard is partially compliant with the requirements of the AEOI Terms of Reference to ensure the effectiveness of the AEOI Standard in practice. While Israel is on track with respect to exchanging the information in an effective and timely manner (CR2), there are significant issues with respect to ensuring that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures (CR1).
Overall rating in relation to the effectiveness in practice: Partially Compliant
General context
Israel committed to commence exchanges under the AEOI Standard in 2018. Due to delays in putting in place the necessary domestic legal framework, Israel commenced exchanges in 2019 and, where possible, also exchanged the information that was due to be exchanged in 2018.
In order to provide for Reporting Financial Institutions to collect and report the information to be exchanged, Israel:
issued the Income Tax Regulations (Implementation of the Common Standard on Reporting and Due Diligence for Financial Account information) in 2019.
Under this framework Reporting Financial Institutions were required to commence the due diligence procedures in relation to New Accounts from 1 April 2019. With respect to Preexisting Accounts, Reporting Financial Institutions were required to complete the due diligence procedures on High Value Individual Accounts by 31 December 2019 and on Lower Value Individual Accounts and Entity Accounts by 31 December 2020.
With respect to the exchange of information under the AEOI Standard, Israel is a Party to the Convention on Mutual Administrative Assistance in Tax Matters and activated the associated CRS Multilateral Competent Authority Agreement in time for exchanges in 2019.
Table 1 sets out the number of Financial Institutions in Israel that reported information on Financial Accounts in 2021 as defined in the AEOI Standard (essentially because they maintained Financial Accounts for Account Holders, or that were related to Controlling Persons, resident in a Reportable Jurisdiction). It also sets out the number of Financial Accounts that they reported in 2021. In this regard, it should be noted that Israel requires the reporting of Financial Accounts held by non-residents based on a prescribed list of exchange partners and some accounts may be required to be reported more than once (e.g. jointly held accounts or accounts with multiple related Controlling Persons), which is reflected in the figures below. These figures provide key contextual information to the development and implementation of Israel’s administrative compliance strategy, which is analysed in the subsequent sections of this report.
Table 2 sets out the number of exchange partners to which information was successfully sent by Israel in the past few years (including where the necessary frameworks, containing an obligation on Reporting Financial Institutions to report information were in place but no relevant Reportable Accounts were identified). These figures provide key contextual information in relation to Israel’s exchanges in practice, which is also analysed in subsequent sections of this report.
In order to provide for the effective implementation of the AEOI Standard, in Israel:
the Israel Tax Authority (the tax authority) has the responsibility to ensure the effective implementation of the due diligence and reporting obligations by Reporting Financial Institutions and for exchanging the information with Israel’s exchange partners;
technical solutions necessary to receive and validate the information reported by Reporting Financial Institutions were put in place by a dedicated CRS reporting portal; and
the Common Transmission System (CTS) is used for the exchange of the information, along with the associated file preparation and encryption requirements.
It should be noted that the review of Israel’s legal frameworks implementing the AEOI Standard concluded with the determination that Israel’s domestic legal framework is Not In Place and its international legal framework is In Place. This has been taken into account when reviewing the effectiveness of Israel’s implementation of the AEOI Standard in practice and where particular identified gaps in Israel’s legal frameworks directly impact its implementation in practice, these are mentioned below.
Findings and conclusions on the legal frameworks
The detailed findings and conclusions on the AEOI legal frameworks for Israel are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Domestic legal framework: Jurisdictions should have a domestic legislative framework in place that requires all Reporting Financial Institutions to conduct the due diligence and reporting procedures in the CRS, and that provides for the effective implementation of the CRS as set out therein.
Israel’s domestic legislative framework is not in place as required as it does not contain several key aspects of the CRS and the Commentary. Significant deficiencies have been identified relating to the scope of Financial Accounts and the due diligence procedures to identify Reportable Accounts (SR 1.2) and the framework to enforce the requirements (SR 1.4). Furthermore, Israel provides for several jurisdiction-specific Non-Reporting Financial Institutions (SR 1.1) that do not meet the requirements of the AEOI Standard.
SR 1.1 Jurisdictions should define the scope of Reporting Financial Institutions consistently with the CRS.
Israel has defined the scope of Reporting Financial Institutions in its domestic legislative framework in a manner that is largely consistent with the CRS and its Commentary. However, deficiencies have been identified. More specifically, Israel provides for two jurisdiction-specific Non-Reporting Financial Institutions that are not in accordance with the requirements. The definition of Reporting Financial Institutions, including the provision of Non-Reporting Financial Institutions, is material to the proper functioning of the AEOI Standard.
Israel should amend its domestic legislative framework to remove two entries from its jurisdiction-specific list of categories of Non-Reporting Financial Institutions as they do not meet the requirements. The entries are: i) provident funds; and ii) small financial institutions.
SR 1.2 Jurisdictions should define the scope of Financial Accounts and Reportable Accounts consistently with the CRS and incorporate the due diligence procedures to identify them.
Israel has not defined the scope of the Financial Accounts that are required to be reported in its domestic legislative framework in a manner that is consistent with the CRS and its Commentary and has not incorporated the due diligence procedures that must be applied to identify them correctly as significant deficiencies have been identified. More specifically, the exclusion of certain equity and debt interests from the definition of Financial Account is not in accordance with the AEOI Standard. Furthermore, Israel provides for several jurisdiction-specific Excluded Accounts that are not in accordance with the requirements. The scope of Financial Accounts and the due diligence procedures to identify them are material to the proper functioning of the AEOI Standard.
Israel should amend its domestic legislative framework to include all of the required categories of Equity or debt interest in the definition of Financial Account in accordance with the AEOI Standard.
Israel should amend its domestic legislative framework to define the term Active NFE in accordance with the AEOI Standard.
Israel should amend its domestic legislative framework to remove three entries from its jurisdiction-specific list of categories of Excluded Accounts as they do not meet the requirements. The entries are: i) undefined group of beneficiary accounts; ii) escrow accounts maintained by lawyers, rabbinical pleaders or accountants; and iii) dormant accounts.
SR 1.3 Jurisdictions should incorporate the reporting requirements contained in Section I of the CRS into their domestic legislative framework.
Israel has incorporated the reporting requirements in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.4 Jurisdictions should have a legislative framework in place that allows for the enforcement of the requirements of the CRS in practice.
Israel does not have a legislative framework in place to enforce the requirements in a manner that is consistent with the CRS and its Commentary as significant deficiencies have been identified. More specifically, Israel’s legislative framework:
does not contain rules to prevent Financial Institutions, persons or intermediaries from adopting practices intended to circumvent the reporting and due diligence procedures as required; and
does not include rules requiring Reporting Financial Institutions to keep records in accordance with the requirements.
These are key elements of the required enforcement framework and are therefore material to the proper functioning of the AEOI Standard.
Israel should amend its domestic legislative framework to include rules to prevent Financial Institutions, persons and intermediaries from adopting practices intended to circumvent the due diligence and reporting procedures.
Israel should amend its domestic legislative framework to require all Reporting Financial Institutions to keep all of the records required to be maintained, rather than relying only on the requirements contained in the AML framework.
Israel should amend its domestic legislative framework to require Reporting Financial Institutions to maintain records for at least five years from the deadline to report the information, in accordance with the AEOI Standard.
CR2 International legal framework: Jurisdictions should have exchange relationships in effect with all Interested Appropriate Partners as committed to and that provide for the exchange of information in accordance with the Model CAA.
Israel’s international legal framework to exchange the information is in place, is consistent with the Model CAA and its Commentary and provides for exchange with all of Israel’s Interested Appropriate Partners (i.e. all jurisdictions that are interested in receiving information from Israel and that meet the required standard in relation to confidentiality and data safeguards) (SRs 2.1 – 2.3).
SR 2.1 Jurisdictions should have exchange agreements in effect with all Interested Appropriate Partners that permit the automatic exchange of CRS information.
Israel has exchange agreements that permit the automatic exchange of CRS information in effect with all its Interested Appropriate Partners.
SR 2.2 Such an exchange agreement should be put in place without undue delay, following the receipt of an expression of interest from an Interested Appropriate Partner.
Israel put in place its exchange agreements without undue delay.
SR 2.3 Jurisdictions should ensure that the exchange agreements in effect provide for the exchange of information in accordance with the requirements of the Model CAA.
Israel’s exchange agreements provide for the exchange of information in accordance with the requirements of the Model CAA.
Findings and conclusions in relation to effectiveness in practice
The detailed findings and conclusions in relation to effectiveness in practice of AEOI for Israel are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Effectiveness in practice: Jurisdictions should ensure that in practice Reporting Financial Institutions correctly implement the due diligence and reporting procedures, which includes a requirement for jurisdictions to have in place an administrative framework to ensure the effective implementation of the CRS.
Israel’s implementation of the AEOI Standard is partially compliant with respect to ensuring that Reporting Financial Institutions are correctly conducting the due diligence and reporting procedures. More specifically, while Israel is meeting expectations with respect to collaboration with its exchange partners to ensure effectiveness (SR 1.6), there are significant issues with respect to ensuring effectiveness in a domestic context, such as through having an effective administrative compliance framework and related procedures (SR 1.5). Israel should continue its implementation process to ensure its effectiveness, including by addressing the recommendations made.
SR 1.5 Jurisdictions should ensure that in practice Reporting Financial Institutions identify the Financial Accounts they maintain, identify the Reportable Accounts among those Financial Accounts, as well as their Account Holders, and where relevant Controlling Persons, by correctly conducting the due diligence procedures and collect and report the required information with respect to each Reportable Account. This includes having in place:
an effective administrative compliance framework to ensure the effective implementation of, and compliance with, the CRS. This framework should:
be based on a strategy that facilitates compliance by Reporting Financial Institutions and which is informed by a risk assessment in respect of the effective implementation of the CRS that takes into account relevant information sources (including third party sources);
include procedures to ensure that Financial Institutions correctly apply the definitions of Reporting Financial Institutions and Non-Reporting Financial Institutions;
include procedures to periodically verify Reporting Financial Institutions’ compliance, conducted by authorities that have adequate powers with respect to the reviewed Reporting Financial Institutions, with procedures to access the records they maintain; and
effective procedures to ensure that Financial Institutions, persons or intermediaries do not circumvent the due diligence and reporting procedures;
effective enforcement mechanisms to address non-compliance by Reporting Financial Institutions;
strong measures to ensure that valid self-certifications are always obtained for New Accounts;
effective procedures to ensure that each, or each type of, jurisdiction-specific Non-Reporting Financial Institution and Excluded Account continue to present a low risk of being used to evade tax; and
effective procedures to follow up with a Reporting Financial Institution when undocumented accounts are reported in order to establish the reasons why such information is being reported.
In order to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, Israel implemented many of the requirements in accordance with expectations. However, significant issues were identified. The key findings were as follows:
Israel has developed and commenced implementing an overarching strategy to ensure compliance with the AEOI Standard developed after conducting a risk assessment that took into account a range of relevant information sources, such as information obtained from questionnaires, risk assessment reports from the Money Laundering Authority and information held by the tax authority. Israel’s compliance strategy facilitates compliance and incorporates a credible approach to enforcement and it intends to keep its compliance strategy and risk assessment under review to ensure its effectiveness on an ongoing basis.
Israel has worked to understand its population of Financial Institutions, including relevant non-regulated entities, through mandatory registration that also covers Non-Reporting Financial Institutions, and imposes an obligation for nil reporting. Israel plans to cross-check this against various relevant information sources, such as domestic reporting records, the Foreign Financial Institution list for FATCA purposes and information held by Financial Institutions on account holders claiming to be Financial Institutions. Israel is taking action to ensure that Reporting Financial Institutions are classifying themselves correctly under its domestic rules and reporting information as required. Israel also plans to keep its understanding of its Financial Institutions’ population up to date on a routine basis.
The institution responsible for implementing Israel’s compliance strategy appears to have the necessary powers and resources to discharge its functions .With respect to resourcing, Israel has assigned the equivalent of three full time staff to monitor and ensure compliance by Reporting Financial Institutions, with further assistance from a legal specialist.
Israel is carrying out a phased compliance review process beginning with questionnaires, leading to onsite high-level reviews, including of the policies and procedures of Reporting Financial Institutions. It has plans to carry out the advanced phase of this process through audits of underlying documentation, including self-certifications, to verify compliance with the due diligence and reporting procedures. Israel will implement these plans when it completes the development of specific IT systems to facilitate these activities. Overall, they appear to have an effective plan to verify compliance with the requirements, incorporating appropriate compliance activities. However, reference is made to the current lack of a legal basis to require all Reporting Financial Institutions to keep specific records in relation to the AEOI Standard, which may constrain Israel’s ability to fully verify compliance.
Israel is seeking information on undocumented accounts through questionnaires. However, the identification and follow-up of Reporting Financial Institutions that report undocumented accounts cannot be carried out systematically until the information reported can be analysed. There are also no clearly defined procedures in place or effective actions taken to ensure self-certifications are obtained as required. Israel also does not have procedures to address circumvention of the due diligence and reporting procedures by Financial Institutions, persons or intermediaries, reflecting its lack of a legal basis to address such circumvention.
Israel has procedures in place to keep its jurisdiction-specific lists of Non-Reporting Financial Institutions and Excluded Accounts under review to ensure they continue to pose a low risk of being used for tax evasion purposes.
Israel has two categories of Non-Reporting Financial Institutions and three categories of Excluded Accounts that have been recommended to be removed from its jurisdiction-specific lists.
Table 3 provides a summary of the specific activities undertaken, or that are planned to be undertaken, in relation to each of the key parts of the framework described above.
Israel was not able to confirm that it collects and monitors information on the proportion of Financial Accounts that are reported that include information on the Tax Identification Numbers or dates of birth with respect to the individuals associated with them. These data points are key to exchange partners to effectively utilise the information and are important to developing an effective compliance strategy to ensure the AEOI Standard is being effectively implemented. Israel therefore plans to redevelop its systems used for handling this data in order to gain the ability to monitor this information. Israel also plans to collect and monitor information on the number of undocumented accounts reported by its Reporting Financial Institutions. This information is crucial to implementing the requirement to follow up on undocumented accounts.
Feedback from Israel’s exchange partners indicated that, compared to what they generally experience when seeking to match information received from their exchange partners with their taxpayer database, they achieved a relatively lower level of success when seeking to match information received from Israel. Follow-up discussions confirmed that Israel is aware of these issues and is seeking to improve the situation including by resending files with added TINs for a substantial number of accounts.
Based on these findings it was concluded that Israel is partially meeting expectations in ensuring that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, including by having in place the required administrative compliance framework and related procedures. More specifically, significant issues have been identified, including with respect to its ability to conduct verification and enforcement activities to ensure that the information being reported is complete and accurate and to follow up with Reporting Financial Institutions that report undocumented accounts. Israel should therefore continue its implementation process accordingly, including by addressing the recommendations made.
Israel should fully implement its procedures to identify the population of the Reporting Financial Institutions.
Israel should further develop and implement procedures to verify that Reporting Financial Institutions are effectively implementing the AEOI Standard and are reporting complete and accurate information, including through in-depth reviews and reviewing the records they hold. Reference is made to the recommendations in relation to introducing record-keeping requirements with respect to the AEOI Standard made during the assessment of Israel’s legal frameworks for AEOI, which may constrain Israel’s ability to verify compliance.
Israel should put in place a clearly defined policy that, where circumvention is identified, action is taken to address it. Reference is made to the recommendation in relation to preventing circumvention made during the assessment of Israel’s legal frameworks for AEOI.
Israel should ensure it can analyse the information reported to support an effective compliance strategy, including implementing systems to collect and monitor information on the reporting of Tax Identification Numbers, dates of birth and undocumented accounts.
Israel should systematically follow up with Reporting Financial Institutions that report undocumented accounts.
SR 1.6 Jurisdictions should collaborate on compliance and enforcement. This requires jurisdictions to:
use all appropriate measures available under the jurisdiction’s domestic law to address errors or non-compliance notified to the jurisdiction by an exchange partner; and
have in place effective procedures to notify an exchange partner of errors that may have led to incomplete or incorrect information reporting or non-compliance with the due diligence or reporting procedures by a Reporting Financial Institution in the jurisdiction of the exchange partner.
In order to collaborate on compliance and enforcement, it appears that Israel implemented all of the requirements in relation to issues notified to them (i.e. under Section 4 of the MCAA or equivalent) in accordance with expectations. While no such notifications have yet been received, Israel has the necessary systems and procedures to process them as required. It also appears that Israel will notify its partners effectively of errors or suspected non-compliance it identifies when utilising the information received.
Based on these findings it was concluded that Israel is fully meeting expectations in relation to collaborating with its exchange partners to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures. Israel is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
CR2 Effectiveness in practice: Jurisdictions should exchange the information effectively in practice, in a timely manner, including by sorting, preparing, validating and transmitting it in accordance with the AEOI Standard.
Israel’s implementation of the AEOI Standard is on track with respect to exchanging the information effectively in practice, including in relation to sorting, preparing and validating the information (SR 2.4), correctly transmitting the information in a timely manner (SRs 2.5 – 2.8) and providing corrections, amendments or additions to the information (SR 2.9). Israel is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.4 Jurisdictions should sort, prepare and validate the information in accordance with the CRS XML Schema and the associated requirements in the CRS XML Schema User Guide and the File Error and Correction-related validations in the Status Message User Guide (i.e. the 50000 and 80000 range).
Feedback from Israel’s exchange partners did not raise any specific concerns with respect to their ability to process the information received from Israel and therefore with respect to Israel’s implementation of these requirements. More generally, none of Israel’s exchange partners reported rejecting more than 25% of the files received. This is very low when compared to other jurisdictions.
Based on these findings it was concluded that Israel is fully meeting expectations in relation to sorting, preparing and validating the information. Israel is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.5 Jurisdictions should agree and use, with each exchange partner, transmission methods that meet appropriate minimum standards to ensure the confidentiality and integrity of the data throughout the transmission, including its encryption to a minimum secure standard.
In order to put in place an agreed transmission method that meets appropriate minimum standards in confidentiality, integrity of the data and encryption for use with each of its exchange partners, Israel linked to the CTS.
Based on these findings it was concluded that Israel is fully meeting expectations in relation to agreeing and using appropriate transmission methods with each of its partners. Israel is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.6 Jurisdictions should carry out all exchanges annually within nine months of the end of the calendar year to which the information relates.
Feedback from Israel’s exchange partners did not raise any concerns with respect to timeliness of the exchanges by Israel and therefore with respect to Israel’s implementation of this requirement.
Based on these findings it was concluded that Israel is fully meeting expectations in relation to exchanging the information in a timely manner. Israel is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.7 Jurisdictions should send the information in accordance with the agreed transmission methods and encryption standards.
Feedback from Israel’s exchange partners did not raise any concerns with respect to Israel’s use of the agreed transmission methods and therefore with Israel’s implementation of this requirement.
Based on these findings it was concluded that Israel is fully meeting expectations in relation to sending the information in accordance with the agreed transmission methods and encryption standards. Israel is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.8 Jurisdictions should have the systems in place to receive information and, once it has been received, should send a status message to the sending jurisdictions in accordance with the CRS Status Message XML Schema and the related User Guide.
Feedback from Israel’s exchange partners did not raise any concerns with respect to Israel’s receipt of the information and therefore with Israel’s implementation of these requirements.
Based on these findings it was concluded that Israel is fully meeting expectations in relation to the receipt of the information. Israel is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.9 Jurisdictions should respond to a notification from an exchange partner as referred to in Section 4 of the Model CAA (which may include Status Messages) in accordance with the timelines set out in the Commentary to Section 4 of the Model CAA. In all other cases, jurisdictions should send corrected, amended or additional information received from a Reporting Financial Institution as soon as possible after it has been received.
Israel appears ready to respond to notifications and to provide corrected, amended or additional information in a timely manner and no such concerns were raised by Israel’s exchange partners and therefore with respect to Israel’s implementation of these requirements.
Based on these findings it was concluded that Israel appears to be meeting expectations in relation to responding to notifications from exchange partners and the sending of corrected, amended or additional information. Israel is encouraged to continue to ensure the ongoing effectiveness of its implementation.