The Israeli Tax Authority (ITA) published, on 3 July 2019, an updated 1385 Form for declaring international transactions between related parties, in accordance with Section 85A of the Income Tax Ordinance and its regulations. The updated 1385 Form was to be applicable for 2018 filings.

However, the ITA recently announced that the use of the updated 1385 Form (for reporting intercompany transactions as part of the Israeli tax filings) is postponed until the filings of the 2019 tax returns. For tax year 2018, companies can choose to file the updated or the original 1385 Form.

The updated form features additional details regarding the intercompany transactions. New elements to be indicated on the form include:

• The pricing method used should be accurately defined, specifying the profit level indicator used and the amount of money transferred.
• Information about the party with whom the transactions were conducted, possibly to cross-check with the tax authority in the country of the related party.
• Signature of an individual with a defined position in the company, whereas in the past it was possible to sign on behalf of the company.
• It should be noted whether “safe harbors” were used, as per Income Tax Circular 12/2018.¹

Implications

The scope, complexity and accuracy requested by the new form require strict implementation and documentation of the transfer pricing methods applied by the company. In addition, mismatches in accounting principles can lead to a discrepancy between the data as recorded in Israel and the data recorded in the country of the related party. Ultimately, the results of the transaction on both sides should be accurate, aligned and based on accepted transfer pricing methods.

Multinationals with Israeli filing obligations are encouraged to assess their compliance requirements as a result of the changes to the new 1385 Form, in order to be aligned with the Israeli Transfer Pricing (TP) regulations and ITA TP circulars and prepared for the 2019 filings when use of the 1385 Form will be mandatory.

Endnote

1. See EY Global Tax Alert, Israel’s Tax Authority releases circulars on transfer pricing methods and profitability ranges in certain local transactions, dated 13 September 2018.

For additional information with respect to this Alert, please contact the following:

EY Israel, Kost Forer Gabbay & Kasierer, Tel Aviv

• Sharon Shulman|sharon.shulman@il.ey.com
• Lior Harary-Nitzan|lior.harary-nitzan@il.ey.com
• Eyal Gonen|eyal.gonen@il.ey.com

Ernst & Young LLP (United States), Israel Tax Desk, New York

• Lital Haber|lital.haber1@ey.com

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