U.S Tax Desk Newsletter - July 2022

Transfer Pricing Bill in Israel passes third reading in June 2022 and is approved. What are the implications for businesses in Israel?

In June 2022, the new transfer pricing bill was approved. This is another step towards the Israel Tax Authorities (ITA) efforts to streamline the ITA’s supervision and control of transfer pricing relating to companies with operations in Israel.

The Israel Transfer Pricing regime is regulated by Section 85A of the Israel Income Tax Ordinance, which initially came into effect in November 2006. Guidance to the legislation was provided in several circulars including transfer pricing updates in June 2020 (Circular 01/2020); November 2018 (Circular 15/2018); and September 2018 (Circular 11 and 12/2018).

The need for additional regulation was initiated as part of the provisions of Part 13 of the Base Erosion and Profit Shifting Program (BEPS), which is an OECD program to prevent tax avoidance by multinational enterprises (MNEs). Under BEPS Part 13, all MNEs with a group turnover exceeding EUR 350 million, are required to prepare a Country-by-Country Report (CbCR) with comprehensive data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions, in which it operates. This CbCR is shared with tax administrations in these jurisdictions for use in high-level transfer pricing and BEPS risk assessments.

Israel had initially committed to full compliance with these OECD regulations as early as 2016-2017 but had not managed to pass the legislation until last month.

Currently, transfer pricing is reported through ITA transfer pricing form 1385, which is included in the annual tax pack submitted by the Company reporting in Israel to the tax authorities. The tax form is submitted by corporate taxpayers and declares that the entity has engaged in cross-border transactions with related parties and that these transactions have been conducted at arms-length. The form specifies the number of transactions, the transaction type, terms and conditions, parties to the transaction, transfer pricing method used, profitability rate, and whether or not the transactions are reported based on the new safe harbors detailed in Tax Circular 12/2018.

These forms currently enforce the company’s responsibility to keep up to date transfer pricing documentation, which includes, at a minimum, a transfer pricing study and an intercompany agreement.

The new regulation will apply to companies headquartered in Israel with global subsidiaries, as well as multinational companies headquartered outside of Israel, but with subsidiaries in Israel. The purpose is to oblige companies to provide the required legislative information to the Israel Tax Authorities (ITA) on an annual basis. This is to encourage transparency and prevent tax evasion in the form of profit shifting. The updated reporting framework will also help the ITA to understand the division of profits throughout the global entity and, if necessary, reallocate profits and, thereby, taxes to Israel.

The details of the legislation are expected to be finalized during the remainder of 2022.

For further information, contact Mazars in Israel.

Please note that the above article does not constitute advice and should not be relied upon for decision-making purposes.