Amendments to transfer pricing documentation requirements in Israel have been under the status of ‘proposed’ for almost two years. Just before the Israeli government (the Knesset) dissolved pending a new round of elections, however, Amendment #261 to the Israeli Tax Ordinance (5721-1961) was approved in the second and third reading on June 30, 2022.
Israel’s initial transfer pricing legislation implements Section 85A of the Israeli Tax Ordinance, ‘Determination of Market Conditions 5767-2006’ (“Section 85A”), addressing the definition of a related party, transfer pricing methods (including a method hierarchy), and outlining the documentation requirements. Although Israel has been part of the Organization for Economic Cooperation and Development (“OECD”) since 2010, it had been a late adopter of the 2017 amended Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “OECD Guidelines”), which incorporates Action 13 of the OECD/G20 base erosion profit shifting (“BEPS”) initiative, outlining master file, local file, and country-by-country reporting (“CbCR”) requirements. This amendment now aligns Israel’s transfer pricing laws more closely with these requirements.
This amendment defines an Ultimate Parent Entity (“UPE”) in Israel. Such UPEs with an Israeli parent company and consolidated revenue of 3.4 billion Israeli Shekel (“ILS”) (approximately €750 million) will be required to file CbCR as well as filing other data on cross-border activities to be available to the Israeli Tax Authorities (“ITA”) for sharing with other countries that are also signatories to a multi-lateral instrument, aimed to increase transparency between tax authorities and implement the OECD / BEPS measures. Such data will be requested by the ITA in a form to be published.
Other expected changes include the possible implementation of contemporaneous documentation requirements (replacing the current 60-day grace) and an updated 1385 disclosure form that currently details the nature and scope of cross-border, controlled transactions as well as the prices, terms and conditions thereof and application of safe harbors. Finally, Section 85A itself may be updated to reflect the aforementioned changes.