In early July, the Israeli Tax Authority (ITA) issued an update to Form 1385
- "Declaration of International Transaction.”
Form 1385 assists the ITA in identifying taxpayers that have transactions with foreign related parties. To ensure these transactions are reported in accordance with the arm’s length provisions, Form 1385 includes a built-in declaration stating the inter-company transaction is at arm's length (per section 85A of the Income Tax Ordinance). It should be noted that Form 1385 does not replace the transfer pricing documentation requirement, which did not change.
Key Changes in Form 1385 Include:
1. More details on the inter-company transaction:
a. Broader information on the foreign related party including its address and its tax identification number (TIN);
b. The specific profitability ratio (e.g., operating profit margin, cost-plus ...) used to determine the arm’s length price;
c. Indication whether the transaction fell under the definitions and reported according to the 'green track' per the Income Tax Circular 12/2018.
2. A personal signature of the company’s officer on the declaration. Compared to a corporation stamp that was used in the previous form.
• The importance of alignment and consistency among the tax return, the transfer pricing report, and the inter-company agreement.
• Specifying the tax ID number of the foreign-related company aligns with the global exchange of information and cooperation across tax authorities. The Israeli Tax Authority will be able to obtain information from relevant foreign tax authorities more efficiently. Requesting such information may increase the audit risk in the other country.
• Personal responsibility and liability for the company’s officer. An unsupported declaration with the appropriate documentation may trigger personal implications.