Transfer Pricing in Israel: A Comprehensive Overview
Introduction to Israeli Transfer Pricing
Israel’s Transfer Pricing framework, primarily governed by Section 85A of the Israeli Tax Ordinance since 2006, emphasizes the arm’s length principle for international transactions among related parties. It draws inspiration from OECD Transfer Pricing Guidelines and Section 482 of the US Internal Revenue Code.
Legislation and Regulations
References to International and Local Rules
Israel’s transfer pricing regulations revolve around Section 85A of the Israeli Tax Ordinance, Section 86 of the same ordinance, Tax Circular 3/2008, Section 482 of the US Internal Revenue Code, and the OECD Guidelines.
Defining Related Parties
Related parties, as per Section 85A(b), encompass entities or individuals with a special relationship. This includes control over a transaction or parties directly or indirectly, individually or jointly. Control denotes holding 50% or more of a means of control, covering rights like receiving profits and appointing directors. Relatives involve spouses, siblings, parents, grandparents, offspring, and their spouses.
Transfer Pricing Documentation
Israel follows the OECD TP guidelines for Transfer Pricing Documentation. It mandates an updated Local File, a Master File when applicable, and potentially a Country-by-Country Report (CbCR).
Advance Pricing Agreements (APA)
APAs are available under Sections 85A(d) and 158 of the Income Tax Ordinance, featuring both unilateral and bilateral options. The ITA requires specific information for an initial APA request.
Israel houses a dedicated Transfer Pricing Department (TPD), responsible for conducting audits and economic analyses to determine arm’s length prices. The TPD also has the authority to review and tax previously approved assessments.
Transfer Pricing Documentation Levels
In-Depth Documentation Requirements
To ensure compliance with the arm’s length principle, taxpayers must maintain up-to-date transfer pricing documentation. This includes a detailed description of intercompany transactions, parties involved, management structures, and functional analyses.
Choice of Transfer Pricing Method
Israel doesn’t prioritize one method over another. The acceptable methods include Comparable Uncontrolled Price, Resale Price, Cost Plus, Transactional Net Margin, and Profit Split methods. If none are suitable, taxpayers can opt for another approach.
Economic Analysis and Benchmark Study
Taxpayers are obligated to conduct a benchmark study to ascertain arm’s length prices for transactions. Local comparables are preferred, but international comparables can be used when necessary.
Master File and Country-by-Country Report (CbCR)
Entities within multinational groups with significant income must provide a Master File. Companies that serve as ultimate parents of groups with substantial turnovers need to file a CbCR, aligning with global standards.
Forms and Disclosures
Starting from the fiscal year 2022, Israeli entities must submit additional forms, including disclosure of intercompany loans and details on the multinational enterprise group.
Intercompany (IC) Legal Agreements
While Inter-company legal agreements formalize relationships between group entities, they hold a lower priority following changes in the 2017 OECD Guidelines.
Intra-company transactions must be disclosed in financial statements.
Transfer Pricing Documentation Requirements
The documentation requirements, including formats, deadlines, thresholds, and languages, are illustrated for CIT, master files, local files, CbCR, local forms, annual accounts, and segmented P&L documentation. Documents can be filed in English or Hebrew.
Notification and Record-Keeping
Notification deadlines are set for December 31 of the year following the tax year, with provisions for the submission of documents upon request by the Tax Authorities.
Penalties and Interest Charges
Although specific penalties for transfer pricing are absent, general penalties specified in the ITO apply. The ITA allows 30 days to present requested documentation.