July 15, 2022
Israel adopts BEPS Action 13 principles
On 30 June 2022, the Israeli Parliament passed legislation (a draft bill presented in October 20201) to amend Section 85A of the Income Tax Ordinance (ITO) and its regulations, by introducing substantial changes to the current transfer pricing (TP) reporting and documentation obligations of multinational enterprises (MNEs) in Israel.
The new legislation, which entered into force on 5 July 2022 (upon its publication), adopts and incorporates the principles of the Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting (BEPS) Action 13, that introduced requirements for a Local File, Master File, and a Country-by-Country (CbC) report, where applicable. Accordingly, the amendment establishes rules for TP documentation, to be prepared annually, with extensive and far-reaching disclosure requirements.
Multinationals with Israeli activity should carefully review the new legislation and assess their readiness and alignment with the new Israeli TP requirements to be better positioned in a potential audit, and to avoid penalties for noncompliance with TP rules and regulations.
As one of its final acts before the decision to dissolve (which is the act that starts the countdown towards new elections), the Israeli Parliament passed legislation to amend the ITO and adjust the Israeli TP compliance and reporting requirements to align with BEPS Action 13 principles.
The following are the main legislative amendments that were introduced into the Israeli TP rules and pending regulations (which are expected to be published within the next couple of months):
Summary of major changes
The draft legislation would require:
As only compliance with all of the draft legislation requirements will shift the burden of proof from the taxpayer to the tax assessing officer, it in practice places a much higher burden on the taxpayer than in the current status and anchors the ITA's position on the burden of proof as presented in tax circular 1/20202 within the language of the law.
The purpose of the TP legislation is to enable the ITA to obtain more information on MNEs' Israeli and global operations, and to meet its obligations under international agreements to implement certain reporting obligations and share information with tax authorities worldwide.
Due to the broad implications of this legislation, and the immediate impact it has and will have once the regulations are final, MNEs should carefully review this amendment to assess its impact on their TP reporting and documentation in Israel and consider necessary actions and alignment.
For additional information with respect to this Alert, please contact the following:
EY Israel, Tel Aviv
Ernst & Young LLP, Israel Tax Desk, New York
1 See EY Global Tax Alert, Israel's Tax Authority releases draft bill to significantly amend transfer pricing rules and regulations, dated 16 October 2020.
2 See EY Global Tax Alert, Israel's Tax Authority Releases Tax Circular on Burden of Proof Related to Transfer Pricing Audits, dated 5 June 2020.