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Knesset Rebels at IRS Pressure

Avi Friedman

Will integrating an American law as part of Israel’s tax code violate both fundamental principles of privacy as well as the US Constitution?

Wednesday, June 22, 2016

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Moshe Gafni sticks up for US taxpayers in Israel.

Members of the Knesset Finance Committee blasted a proposal to adopt an American law as part of Israel’ s tax code, and Israeli-American lawyers said the proposal violates both fundamental principles of privacy as well as the US Constitution. 

The proposal, known as the Foreign Account Tax Compliance Act (FATCA), was passed by Congress in 2011 and requires Israeli banks, investment houses, and insurers, to share financial information with the Internal Revenue Service about account holders who may be US citizens. In 2014, representatives of Israel’s Ministry of Finance signed the agreement, expecting easy approval from the Knesset, but thousands of Israelis have contacted Knesset members to object to the proposal. 

Finance Committee Chairman Moshe Gafni (UTJ) called the bill a “bad law,” warning it would violate wholesale the privacy of thousands of Israeli citizens and expose them to IRS jurisdiction, whether or not they have any real ties to the United States. 

Noam Schreiber, an attorney with Zell, Aron & Co., stressed that American citizens in Israel must comply with US law by filing US tax returns, and by paying taxes on foreign earnings when legally required. But he added that FATCA is both an unnecessary invasion of privacy and a violation of Israeli sovereignty. He also said his firm considers the law an unconstitutional violation of American citizens’ presumption of innocence, and said that a consortium of law firms will take action inside the United States to challenge the legality of the measure. Americans are already subject to filing FBAR forms, which disclose information about money held in foreign accounts.

 

“It’s outrageous,” Schreiber fumed following the Knesset hearing on June 20. “If Congress is worried about Americans avoiding taxes by hiding assets in Israel, there are provisions to address this eventuality in the existing agreements protecting citizens of both countries from double taxation. But here, the American government has threatened Israeli financial institutions with economic sanctions if they do not comply with FATCA, and the banks here are petrified. As a result, Americans in Israel can have their accounts frozen if they do not sign a privacy waiver, and the bank does not even have to notify the account holder!” 

Asked whether Israel’s financial institutions have the ability to withstand potential sanctions if the Knesset eventually rejects key aspects of FATCA, or even the entire agreement itself, Schreiber said that while Israel’s ties with the US are certainly critical, it is imperative for any country to defend its sovereignty and say “no” if and when the need arises.

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