The Israeli Ministry of Finance has published proposed significant amendments to the transfer pricing chapters of Israel's legislation for public consultation. Henriette Fuchs, Partner at Pearl Cohen Zedek Latzer Baratz looks at the detail of the proposed measures and analyzes what the changes mean for multinational enterprises operating in Israel.

Whilst Israel was among the early adopters of the Common Reporting Standard in 2018, the Third Phase Peer Review of the Organization for Economic Co-operation and Development (OECD) Inclusive Framework 2020, published on October 17, 2020, shows that at the end of 2019 Israel was still lagging behind with the implementation of rules for country-by-country (CbC) intergroup pricing reporting and the necessary legislative checks and balances for proper future international exchange of the CbC information eventually received. In August 2018, the OECD's mutual agreement procedure (MAP) minimum standard peer review had already recommended that Israel improve and expand the functionality of the rules for efficient and effective resolve of bilateral tax disputes as required per BEPS Action 14 MAP commitments.

Tax professionals are now following, with a mixture of interest and concern, how the proposed (the proposals may be found here and here) attribution of the burden of proof to the taxpayer in transfer pricing matters and the implementation of exchange of CbC data, may impact tax certainty for multinational enterprises (MNEs) operating in Israel, especially in the absence of a sufficient and public Israeli MAP venue in accordance with OECD standards.

The OECD's BEPS Transfer Pricing and Israel's Pending Adjustments

Today, the transfer pricing sections of Israel's Income Tax Ordinance (ITO) and the accompanying regulations deal only with local requirements (the Local File) for the Israeli taxpayer to report its transactions with related foreign parties. The OECD's BEPS Action 13 instructs countries to require also a Master File and a CbC report in addition to the Local File requirements.

The Master File ought to contain quite extensive standardized information regarding all members of the multinational group and must be filed by an Ultimate Parent Entity (UPE) of an MNE with a revenue of at least 750 million euros ($876 million, approximately 3 billion Israeli shekels). It would have to contain information relating to global allocation of income of the multinational group, indicators for the location of economic activity and taxation facts pertaining to the group.

The CbC reports would eventually have to be created also by UPEs located in Israel and will be subject to exchange between Israel and countries which are signatories to the OECD's Multilateral Competent Authority Agreement.

The proposed ITO amendments now contain new definitions and consider as an MNE a group of at least two entities in which (i) at least one of the entities is foreign; and (ii) one entity controls the other entities directly or indirectly. The entity at the top of the ownership chain of an MNE is introduced as the UPE, which-when located in Israel-should prepare consolidated financial statements of the MNE and file those in Israel when its annual revenues are in excess of 750 million euros in the year. The draft also explains that the Israeli CbC file should consist of two parts: (i) details pertaining to each tax jurisdiction (in which the MNE maintains activities) regarding revenue, profit (loss) before tax, taxes paid, tax liability accrued, share capital, accumulated earnings, number of employees, and tangible assets; and (ii) a list of all connected entities by tax jurisdiction and their main business activities.

Currently, an Israeli corporate taxpayer only needs to provide a transfer pricing study-and more details regarding the related party transactions-when so requested by the assessing officer, and is awarded 60 days to submit the requested materials. The draft legislation, once accepted, expects the transfer pricing study, as well as a Local File and a Master File available already on the day the annual (self-assessment) tax return is filed, and released to the tax authorities upon request without delay.

A transfer pricing study would in the future have to include numerous new details in the Local File such as the group's organizational chart, a list of activities, changes of ownership, expected changes of ownership and a list of main competitors. Extensive information with respect to the MNE would have to be included in the Master File, including a chart of the MNE's holdings (including geographic locations and forms of incorporation), a summary of the supply chain, a list of service agreements within the group, information regarding intangible assets, information regarding the MNE's financing, and the consolidated financial reports of the MNE.

A company qualifying as the UPE of a MNE would have to file a CbC report every year (in English) within a year from the end of the relevant tax year. Under certain conditions the Israeli Tax Authority may even require a UPE report from an MNE member in Israel even if the particular company does not answer to the definition of a UPE. These CbC reports will be shared with other countries.

Burden of Proof

The draft legislation explicitly places the burden of proof regarding transfer pricing positions on the taxpayer and can only shift to the tax assessor when the reporting entity "shall have met all extensive reporting and documentation obligations." This subjective condition for release from a vast burden of proof causes great concern among "experienced" taxpayers and legal professionals, because in practice this rather "subjective" condition is hard to fulfil: in particular when the tax assessor will generally not want to volunteer to take the burden of proof upon himself and will therefore insist on (more) documentation in the framework of a tax audit, or on receiving documentation that the Israeli group company may not have, to which it even may not have access or which might not even exactly exist.

The way the draft is phrased right now it is expected that, in practice, the burden of proof in nearly all cases will remain firmly on the taxpayer and the tax authorities will seldom-or never-be required to table their own economic pricing analysis. This will also impact the balance in tax litigation where the courts are yet to familiarize themselves with the "economic legal matters" of transfer pricing.


An additional and very relevant challenge is posed by a similar documentation requirement that an Israeli taxpayer must satisfy to be granted access to a mutual agreement and bilateral resolution process of sorts under Israel's "internal" MAP guidelines. BEPS Action 14 on "tax dispute resolution" is also being closely monitored by the OECD; on the subject of the MAP the OECD has commented to Israel, in its particular 2018 MAP Peer Review, that Israel should publish clear and transparent admissible MAP rules to include also "transfer pricing" disputes and a range of other features essentially required to safeguard the interest of the taxpayer with a swift resolution and certain bilateral guarantees.

A sticky burden of proof for transfer pricing issues in combination with the absence of a commitment by Israel to an effective, and (also) transfer-pricing attuned, MAP may leave taxpayers in uncertainty for many years regarding cross-border group relations; not only when a dispute and mismatch arises regarding the pricing of a related party transaction but also regarding the classification of the transaction and its significance altogether

Protection of Taxpayer and International Exchange of CbC Information

The OECD explained-again in its CbC Reporting Peer Review-that any (automatic) exchange of CbC reports by the Israeli authorities with the authorities in countries listed in a CbC report by a UPE, should be carried out under the safeguards of an international agreement. That may be a Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAAC), a Double Tax Convention (DTC) or an Agreement for Tax Information Exchange (TIEA) permitting the automatic exchange of information (AEOI)). A Qualifying Competent Authority Agreement (QCAA) which sets out the operational details of the exchange of CbC reports should in any case be in place.

As one of the four "BEPS minimum standards," the CbC reporting requirements are subject to peer review to ensure timely accurate implementation and make for a unified playing field. The peer review process focuses on three key elements of the minimum standard: (i) the domestic legal and administrative framework; (ii) the exchange of information framework; and (iii) the confidentiality and appropriate use of CbC reports.

Again, in its 2020 Peer Review update recently published, the OECD recommended that Israel take steps to ensure that it has QCAAs in place with jurisdictions of the Inclusive Framework which meet the confidentiality, consistency and appropriate use conditions under international exchange of information agreements. It seems that this recommendation still largely remains to be dealt with, as well as procedures to ensure that the exchange of information is conducted in a manner consistent with the terms of the framework, ahead of any first exchanges of information.

Planning Points

The proposal signifies a vast change to the current requirements and risks in relation to Israeli transfer pricing documentation and requirements and introduces an immediacy for a taxpayer to produce documentation when asked to. Whilst the draft amendments were only published for first public comment, substantial changes to their final reading are not thought likely. In the meanwhile, it is not yet clear when the transfer pricing changes might go into effect, while the implementation of minimum checks and balances for proper international CbC exchange are still to be secured by Israel.

The draft contains quite impressive new requirements that will affect all corporate taxpayers, while the burden of proof on the taxpayer poses a checkmate in favor of the tax authorities, as they can hardly be forced to submit an independent economic assessment that could break an impasse. Note that the proposal to load the burden of proof onto the taxpayer was not among the recommended features of the Multilateral CAA and cannot be found in the OECD's "Guidance on the Implementation of Country-by-Country Reporting." Quite the opposite; the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2017) actually confirmed that "taxpayers should not have to incur a disproportionate burden or costs for producing documentation." The absence of a "minimum standard MAP process" under domestic rules in Israel will leave even the most well-behaved of MNEs "all dressed up but no place to go."

MNEs active in Israel may be well advised to initiate, if need be through the tax authorities involved abroad, a request for Advance Pricing Agreements (APA) with the Israeli tax authorities as an alternative for the urgently needed open and transparent MAP rules; only an APA can reduce imminent transfer pricing uncertainty and allow the MNE's global finance team to "run the business" rather than having to manage multi-year double (tax) jeopardy.

Originally published by Bloomberg Tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.