Updated Israeli Transfer Pricing Documentation and Reporting Requirements.
In September 2022, the Israeli tax authorities (ITA) introduced two new sections to complement its existing transfer pricing regulations (i.e., section 85A). The two new sections (85B and 85C), in essence adopt, the OECD’s Base Erosion and Profit Shifting (BEPS) Action 13 principles, introducing the three-tier transfer pricing documentation requirements, Country-by-Country Reporting (CbCR), Master File, and Local File.
The BEPS Actions, issued in October 2015, further increased scrutiny on transfer pricing methodology. A growing emphasis has been placed on transparency and documentation (BEPS Action 13) with many countries worldwide are accepting and implementing the new actions.
What is Transfer Pricing?
Transfer pricing is the price paid in transactions between related parties upon the internal exchange of tangible property, intangible property, services or financing. An essential component is the idea that an intercompany transaction needs to be conducted based on the arm’s length standard representing market prices between unrelated parties.
Transfer Pricing in Israel
The Israel’s transfer pricing tax regulations were first published in November 2006, pursuant to section 85A of the Ordinance and detailed specific documentation requirements. Sections 85B and 85C specify the additional information to be covered in the transfer pricing documentation to be presented to the ITA and in line with BEPS Action 13. One of the main changes apparent in the new sections, is the need to present transfer pricing documentation within 30 days as compared to the 60 days that were stipulated previously.
Israeli taxpayers that are members in a multinational group of companies with consolidated group revenues exceeding NIS 150 million in the year preceding the reporting year, are now required to include additional information in their transfer pricing documentation, which is in effect a Master File that details information on the entire Group and its intercompany transactions. It should be noted that a Master File is a global file, which can be presented by taxpayers globally in all other tax jurisdictions that adopted the BEPS Action 13 principals. This principle now also applies to Israeli taxpayers who can make use of this same file upon request by the ITA.
The new sections also include rules on CbCR reporting, especially regarding an Israeli ultimate parent company with consolidated group revenues exceeding NIS 3.4 billion.
In December 2022, the ITA revised its 1385 form, which taxpayers are required to file annually. In form 1385 taxpayers specify their intercompany transactions and declare that the pricing of these transactions were conducted according to the Israeli transfer pricing regulations. The revised form is now also asking taxpayers to indicate whether they have prepared a transfer pricing report based on the revised regulations.
The article was written by Sharon Aba and Dan Bram, transfer pricing partner at Sharon Aba TP Services.
Contact them at sharon@abatp.com or dan@abatp.com
