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October 16, 2020
Israelís Tax Authority releases draft bill to significantly amend transfer pricing rules and regulations
The Israeli Tax Authority (ITA) recently published a draft bill for public consultation, proposing to amend Section 85A of the Income Tax Ordinance (ITO) and its regulations, by introducing substantial changes to the current transfer pricing (TP) reporting and documentation obligations of multinational enterprises (MNEs) in Israel. Comments may be submitted until 2 November 2020; the expected date for the final legislation is yet unknown.
The proposed legislation adopts and incorporates the principles of the OECD’s Base Erosion and Profit Shifting (BEPS) Action 13, that introduced requirements for a Local File, Master File, and a Country-by-Country (CbC) report, where applicable. Accordingly, the draft bill sets rules for contemporaneous TP documentation, to be prepared annually, concurrently with the Israeli tax return, with extensive and far reaching disclosure requirements.
Multinationals with Israeli activity should carefully review the proposed legislation and consider their readiness and alignment with such potential Israeli TP requirements, in order to be better positioned in a potential audit, and to avoid penalties for noncompliance with TP rules and regulations.
The following are the main legislative amendments that are proposed to be introduced into the Israeli TP rules and regulations:
The obligation to file applies for every tax year, within one year from the end of the tax year. This report will be submitted online by the ultimate parent entity and will be automatically shared with the tax authorities of the signatory countries to the Tax Information Exchange Agreements. The said report may also be required from companies that are not ultimate parent entities, depending on the ITA’s ability to receive such information under these agreements.
Summary of major changes
The draft legislation would require:
As only compliance with all of the draft legislation requirements will transfer the burden of proof from the taxpayer to the tax assessor, it in practice places a much higher burden on the taxpayer than in the current status, and anchors the ITA’s position on the burden of proof as presented in tax circular 1/20201 in the language of the law.
The purpose of the proposed TP legislation is to enable the ITA to obtain more information on MNEs’ Israeli and global operations, and to meet its obligations under international agreements to implement certain reporting obligation and share information with tax authorities worldwide.
Due to the broad implications of this proposed amendment, and the immediate impact it will have once finalized, MNEs are strongly encouraged to carefully review this draft bill to assess its impact on their TP reporting and documentation in Israel and consider necessary preparation and alignment.
For additional information with respect to this Alert, please contact the following:
EY Israel, Tel Aviv
Ernst & Young LLP (United Sates), Israel Tax Desk, New York