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September 5, 2023

Israeli tax authority issues updated guidance on Mutual Agreement Procedures, in line with BEPS principles

  • On 17 August 2023, the Israeli tax authority (ITA) issued a new circular dealing with updated guidance on Mutual Agreement Procedures.
  • The updated guidance follows principles provided in Action 14 of the Base Erosion and Profit Shifting project led by the Organisation for Economic Co-operation and Development.
  • Israeli and multinational enterprises seeking to settle discrepancies and double taxation arising from inconsistent application and interpretation of tax treaties by tax jurisdictions with which Israel signed a double tax treaty should consider approaching the ITA for a Mutual Agreement Procedure where relevant.


On 17 August 2023, the Israeli tax authority (ITA) issued a circular on the subject of Mutual Agreement Procedures in Double-Tax Treaties — Application and Processing Protocol (the Circular), replacing a 2001 circular as part of the ITA's effort to make the Mutual Agreement Procedure (MAP) more accessible, clear and efficient. The Circular follows the principles provided in Action 14 of the Base Erosion and Profit Shifting (BEPS) project led by the Organisation for Economic Co-operation and Development (OECD), but also brings forth the practical experience that the ITA gained through the years dealing with MAP and with issues that emerged during the process.

The Circular forms one of several important steps by the ITA aimed to provide a supportive environment and certainty to companies.

General description

The Circular elaborates on the different types of MAP, which include bilateral procedures, multilateral procedures and procedures initiated by the ITA or by a competent authority of a treaty country. The Circular further expands the level of documentation required to file a request for MAP.

Additional clarifications provided in the Circular are aimed at streamlining the process and making it more efficient.

The competent authority appointed to manage MAP on behalf of the ITA is the International Tax Department at the Professional Division of the ITA (the Competent Authority). According to the Circular, the Competent Authority must be kept independent and separate from the tax assessing officer who is handling the taxpayer's audit. If relevant, the head of ITA may appoint additional ITA professionals while keeping the Competent Authority independent in its work.

The Circular outlines an inexhaustive list of cases as typical examples for engaging in MAP, including:

  • Determining income allocation between tax jurisdictions (a Transfer Pricing issue)
  • Determining whether a Permanent Establishment (PE) exists in a treaty country and how profit should be allocated to the PE
  • Dealing with double taxation due to dual residency issues
  • Addressing inconsistent income classification
  • Addressing double taxation in cases of exit tax

The Circular clarifies that the Foreign Tax Credit mechanism is subject only to the domestic law and that this rule generally is also reflected in treaties (although it should be noted that some treaties to which Israel is party allow more beneficial tax credit mechanisms). Therefore, Foreign Tax Credits will not be discussed as part of a MAP. Similarly, the Circular states that issues relating to Israeli taxation of Israeli residents is also out of the scope of MAP unless the tax does not conform with a specific treaty provision.

Further, the Circular clarifies that nondiscriminatory administrative requirements should not be used as basis for MAP, as these requirements are typically viewed as being in line with a treaty. A multilateral MAP is mentioned as an option that a taxpayer may request if the question to be discussed involves applicability of multiple tax treaties to which Israel is a party.

The Circular elaborates extensively on the timing for filing a MAP request. It also provides guidance on situations in which MAP deals with (i) closed years for which the statute of limitations period has expired and (ii) issues that annually recur.

According to the Circular's guidance on processing a MAP request, treaty interpretation issues shall be examined based on the relevant treaty provisions and treaty interpretation principles, OECD commentary and Israeli domestic law. Income allocation issues shall be examined based on market-value terms (i.e., arm's length) so that the allocation would be determined as if the parties to an agreement are unrelated, taking into account the treaty's objective to avoid double taxation and the overall circumstances in each case.

The Circular also provides guidance on how to address situations in which the Competent Authority overrules the request for MAP and to address interactions between MAP and ongoing audit and appeal procedures, and MAP.

Guidance in the Circular on completing MAP between competent authorities states that the taxpayer must be notified when successful agreement is reached between competent authorities to allow the taxpayer to accept or appeal within 30 days. If a MAP is unsuccessful, the Competent Authority is not obliged to avoid double taxation if it believes the Israeli tax charge is in line with its internal laws.


The new guidance provides clarity on the ITA's approach to MAP, based on the experience the ITA has gained in recent years. The Circular provides clearer guidance and certainty for companies wishing to engage in MAP to refrain from unnecessary double taxation. This and other steps that the ITA is considering provide a good opportunity for multinational enterprises with Israeli operations to consider engaging in MAP with the ITA to gain more stability and consistency, as well as certainty, when (i) implementing intercompany arrangements, (ii) dealing with Israel-sourced income, (iii) allocating profit to/from Israel and (iv) participating in many other situations that involve treaty provisions and their applicability.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Israel, Tel Aviv

Ernst & Young LLP, Israeli Tax Desk, New York

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor