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Review and adjustments

Review and audit

What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?

Standards are similar to normal tax audits. Compliance requires contemporaneous documentation and its application to the relevant transaction.

Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?

Procedures are similar to normal tax audits.

Penalties

What penalties may be imposed for non-compliance with transfer pricing rules?

There are no specific fines related to transfer pricing. In addition to the reversed burden of proof and setting the required results at the median, interest and linkage are applied in the form of primary and secondary adjustments. In cases where a transaction between related parties lacks any commercial rationality (namely, the same transaction under similar economic circumstances would not have been agreed between non-related parties), the Israeli Tax Authorities (ITA) may choose not to recognise the transaction in its original form and may treat it as an entirely different type of transaction in the form, which in its view would reflect the business reality of the transaction in a more satisfactory way.

Reclassifications such as these can relate to (among other things) the treatment of intercompany loans, cash pooling or non-repayment of inter-company debts as dividends, as well as to the ownership of intangibles. Non-recognition can cause double taxation and, while derived from Section 85A of the Income Tax Ordinance, is also based on Section 86 of the ordinance. A note regarding Form 1385 should be added: although no personal or criminal liability has yet been claimed by the ITA in cases where the form was deemed inaccurate (or not filed), we understand that the ITA is discussing this issue internally.

Adjustments

What rules and restrictions govern transfer pricing adjustments by the tax authorities?

Standards are similar to normal tax audits. Compliance requires contemporaneous documentation and its application to the relevant transaction.

Challenge

How can parties challenge adjustment decisions by the tax authorities?

In the tax assessment process, and then in court.

Mutual agreement procedures

What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?

The competent authority process.

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