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Documentation and reporting

Rules and procedures

What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?

Section 85A of the Income Tax Ordinance and the regulations promulgated thereunder. The Israeli Tax Authorities (ITA) may require a relevant study prepared by the audited taxpayer within 60 days; however, normally the tax authorities request the study within a shorter timeframe (30 days). Although the company is under no obligation and may request 60 days, if the company does not present the study in a timely manner, it usually indicates to the ITA that the company is not in possession of the required study.

Content requirements

What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?

A transfer pricing study (similar to a local file) is required, in a form similar to the requirements in other Organisation for Economic Cooperation and Development countries. Country-by-country and master-file requirements have passed the first reading (out of three) in the Israeli Parliament and are not currently binding, although the ITA tends to request a master file from the taxpayer if available. 


What are the penalties for non-compliance with documentation and reporting requirements?

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 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 intercompany 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.

Best practices

What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?

Best practices include:

  • correct characterisation of the transaction in terms of methods used and expected profit margins;
  • contemporaneous updates (annually); and
  • using the same definitions of the study in intercompany agreements.

Although in our experience most cases do not reach court and are settled, in recent years several cases have been adjudicated by the Israeli courts, which have generally accepted the positions taken by the ITA.

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