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By Jenny David
Sept. 8 — Failing to turn over U.S. citizens' financial account information to the United States beginning Sept. 30 would cause “severe economic damage to Israel's financial system,” Israel's State Attorney's Office said in opposing a lawsuit to stop the transfers.
The government's Sept. 7 rebuttal to a lawsuit challenging Israel's intergovernmental agreement (IGA) to facilitate disclosure under the U.S. Foreign Account Tax Compliance Act (FATCA) “could immediately undermine the ability of Israeli financial institutions to work with financial institutions in the United States” and cause the Israeli economy “significant financial damage.”
“Worldwide financial institutions would also hesitate to work with institutions regarded as not in compliance with FATCA,” the government added.
The issue of complying with FATCA is huge in Israel, where as much as 5 percent of the population—some 300,000 to 400,000 people—hold U.S. citizenship. It's big for banks and other financial institutions as well, as they would face sanctions for noncompliance, including a 30 percent withholding tax on U.S.-sourced income payments.
Israel's Supreme Court issued a temporary injunction in Republicans Overseas Israel v. Israel (H.C.J. 8886-15), against turning over financial information Aug. 31, after Israel's Justice Ministry decided to begin transferring the data on Sept. 1, a month before the Sept. 30 start date approved by Israel's parliamentary Finance Committee (172 ITM, 9/6/16).
A hearing is scheduled for Sept. 12, where the court is expected to allow the transfer of data under Israel's IGA with the U.S. At the court's suggestion, Israel's banking and insurance associations were added to the suit Sept. 7 and are expected to submit their own rebuttals before the Sept. 12 hearing.
Under the IGA, Israel's financial institutions must provide information on all accounts that exceed $50,000 held in 2014 and 2015 by U.S. citizens, including those with dual Israeli citizenship, U.S. green card holders and Israeli residents of the United States.
The regulations also apply to Israeli legal entities in which American citizens have substantial holdings. They don't, however, apply to institutional pension funds, training funds of salaried employees, funds held in legal escrow accounts or religious free-loan funds.
Penalties for failing to provide or incompletely providing information range from 5,000 to 50,000 shekels ($1,290-$12,900) per violation—half the originally envisioned fines as a 30 percent withholding tax on U.S.-sourced income payments.
Marc Zell, a lawyer with Zell, Aron & Co. in Jerusalem, and co-chair of the non-governmental organization affiliated with the U.S. Republican Party that filed the suit, said the government should further delay the financial information transfers.
“Saying a delay will irreparably damage Israel's relations with the United States, especially in the run-up to the American elections, is like shouting fire in a crowded theater,” he said. “It ignores the political realities in the United States, in an election year and with a lame-duck president.”
Zell said if Republicans win, FATCA could be cancelled altogether. “And even if not, opposition to FATCA is growing globally. It's a bad law,” he said.
Even if the suit is dismissed, he said, it drew attention “to the issue and the vigorous and growing dissent in Israel and around the world, for FATCA's violation of privacy rights and constitutional safeguards.”
“Beyond the merits of the case, the government acted in bad faith by trying to transfer the information early. The court picked up on that and acted,” Zell told Bloomberg BNA.
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