With the end of banking confidentiality, many Israelis are fleeing the long arm of the Israel Tax Authority to the tax haven of Dubai, which has no bank reporting.
Tightening tax regulations in many countries, beginning with the US, requiring banks to provide information about their customers, or face sanctions, has caused people with black money, laundered money, or unexplained money to seek friendlier banks; specifically more confidential banks.
The most extreme measure is the US Foreign Account Tax Compliance Act (FATCA), which will soon come into effect. It requires non-US banks to identify US customers and report their assets to the IRS. In line with international demands, banks across the world are requiring their customers to disclose the source of their money, so that they can provide explanations to national tax authorities. However, not every customer can provide acceptable explanations. Not everyone can explain the millions of dollars sitting quietly in a bank account in Switzerland or another country.
Among those with millions in shady money in banks around the world are Israelis who did not take advantage of the Tax Authority's voluntary disclosure program to report the money and pay full taxes on it with no criminal proceedings taken against them. Unexpectedly, some of these Israelis have gone to Dubai. The charm of Dubai, one of the United Arab Emirates (UAE), is a negligible to zero tax policy and complete banking confidentiality.
"Dubai is attractive for businesspeople from all over the world, in part because of certain tax advantages in its unique tax system, which are intended to attract foreign investment," says Gideon Bar-Zakay, an accounting consultant and former senior Tax Authority official. "These are all legitimate and accepted advantages. It is not well known that the UAE has anti double taxation treaties with 70 countries, including China, Belgium Germany, Italy, Canada, Morocco, Japan, Jordan, Lebanon, Syria, Singapore, the Netherlands, Greece, Spain, and France."
Bar-Zakay adds, "Dubai has several laws that allow it to function as a tax haven in many ways, which helps draw investment by foreign residents. For example, subject to certain conditions, it is possible to obtain a full income tax exemption, as well as a corporate tax exemption for up to 15 years. There are also exemptions from deducting tax at source and import duties."
Concealing Israeli identity
Israelis and Diaspora Jews have known for years that Dubai is a tax haven, and some of them have concealed money there. However, bank disclosure requirements on customers' sources of money have caused some Israelis to build complex corporate structures that blur their Israeli identity in order to deposit money in the emirate.
This is how it works: an Israeli seeking to transfer his money from a European bank to a Dubai bank that keeps confidentiality creates a complex corporate structure that hides his tracks as an Israeli. He then closes his account at the European bank that is no longer bound by complete confidentiality.
Bar-Zakay cautions that there is a fundamental flaw in this tax tip. "A person investing capital in Dubai may rely on the fact that it does not have a tax treaty with Israel, but I would attach little importance to this so-called advantage in the contemporary world. People should realize that the old world have given place to a new world. There is old school and new school, and this is an emerging process. The concealment business has gone bankrupt, and anyone who doesn’t understand this is missing an opportunity to end this story eligantly," he says.
"Until recently, people closed accounts and fled to Singapore, and then Singapore began exchanging information. They then fled to Hong Kong, and it too opened up. Now it is Dubai, and it is a really bad idea. First of all, this only postpones the problem, but does not solve it, and may even worsen it, because transferring money to Dubai implies criminal intent of concealment.
"Secondly, there is a real possibility that people won't see their money again. Thirdly, anyone who closes an account puts a bulls-eye on his back. Closing an account is the best way to ensure that tax authorities around the world will become interested in you."
A risky idea
A number of Israelis with unreported money abroad have recently asked Bar-Zakay about transferring money to Dubai. He advises them that it is a "risky idea."
"Almost daily, I receive in my office people from all over the world, both Israelis and foreigners, who have realized that the banking system will not serve them so long as they do not report their accounts to the relevant tax authorities. Even someone who imagines he has found a place where no such questions are asked is liable to be surprised soon," warns Bar-Zakay. "The entire global banking system has decided in principle to verify that customers comply with the tax requirements of their countries of origin, and that will not miss places like Dubai. It will not help someone who closes an account or draws large sums of money and transfers it to Dubai.
"When attempting to fix a small problem, people tend to create a much bigger problem that is actually a serious criminal offense."
Bar-Zakay says that the solution is to jump on the Tax Authority's voluntary disclosure bandwagon as soon as possible. "It is possible to make voluntary disclosure and end the persecution. Many rich people conclude that should make the disclosure, especially when they think about their next generation. They ask themselves if they are bequeathing a gift or trouble to their heirs, because 'death' is not tax planning."
Published by Globes [online], Israel business news - www.globes-online.com - on June 11, 2014
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