The Israeli Tax Authority (ITA) recently announced the successful conclusion of its first Bilateral Advance Pricing Agreement (BAPA) with another the tax authority of country that entered into a double tax treaty with Israel.

Background

Many processes have been underway in recent years aimed at preventing double taxation, while also ensuring adequate taxation and properly distributing income between the various countries in which the group operates. Despite all of these initiatives, the biggest challenge every multinational group faces is tax uncertainty.

In recent years, the ITA has shown an increased willingness to provide more certainty for and collaboration with taxpayers, particularly multinational enterprises (MNEs) aiming for greater stability and transparency concerning their tax outcomes. In particular, despite being previously known for intense scrutiny in tax audits, the ITA has become more receptive to MNEs' growing need for certainty on Israeli tax-related issues.

The Mutual Agreement Procedure (MAP), issued by the ITA in August 2023,¹ represented a significant turning point in the ITA's approach.

A milestone Israeli BAPA

The 18 March 2024 BAPA built upon these developments. Throughout the BAPA proceedings, the ITA, MNE and foreign tax authority managed to define the pricing of specific intercompany transactions within the MNE group. They also established relevant methodologies to allocate profit to each tax jurisdiction for the next five years, considering the MNE's interests.

Although the ITA has shown promising signs of continuing in this direction, more than good faith is required. Amidst a complex process involving the MNE, ITA and the other tax authorities, EY Israel's expertise and experience played a pivotal role in fostering success with this first BAPA, which in turn lays the foundation for future BAPAs.

Implications

Given the global tax environment's uncertainty, tech MNEs operating in Israel may want to consider negotiating a BAPA with the ITA. These MNEs may currently be involved in different processes with different starting points, but they have a common objective, namely increasing certainty with respect to the tax position and result and reducing friction with tax authorities. These processes can be initiated (1) as a result of a past audit (as a continuation of a MAP to eliminate double taxation), (2) in light of ongoing significant activity in Israel, or (3) to create the tax infrastructure for significant planned activities or investment.