Transfer prices of offshore companies operating in Israel

Transfer Pricing Environment in Israel

Transfer pricing controversy cases being examined at all levels by the Israel Tax Authority (“ITA”) have risen over the past several years, while the ITA’s ability to settle these cases with multinational companies appears to be an increasingly more difficult and protracted process.

One of the bases for the increase in ITA transfer pricing examination cases is the still relatively recent issuance of its transfer pricing regulations and its attendant circular, the obligation to fill in a special tax form for transfer pricing purposes that requires itemization of intercompany transactions (Form 1385), and a circular on business conversions in the high technology sector.

Further, with Israel’s entry into the OECD in 2010, the ITA’s transfer pricing department in particular has relied on the resources provided by the OECD regarding training and audit procedures to enable itself to gain the tools necessary to perform transfer pricing examinations. The OECD’s recent Base Erosion and Profit Shifting (BEPS) project has given tax authorities around the world, including the ITA, additional momentum to aggressively conduct tax audits.

Onshore and Offshore

The Israeli tax authorities also examine the issue of splitting transactions between Onshore and Offshore activity. As part of the changes in the law for information sharing between countries, the Tax Authority can now request information from foreign tax authorities in order to examine the split of transactions between Onshore and Offshore of the two countries.

In these cases, the Tax Authority examines whether the contractual or legal split reflects business activity, and whether the split complies with the international definitions of the tax law and permanent establishment definitions, also in accordance with the new definitions of the OECD.

We recommend that the company prepare in advance with a detailed and in-depth position paper that presents the company’s position on the matter and may be assisted by the written opinion of a tax expert. For this purpose, our team of international tax experts is available to assist you in preparing the necessary documents.

Initial issues regarding your company’s activity in Israel

Specific issues that may arise in our initial examination of your company’s activity at the Israeli level and in the international level, or could rise in the future, in accordance with the issues presented above. (With regard to arm’s length transactions, transfer pricing, parties with special relations).

  • Overhead expenses from the head office to the branch/subsidiary.
  • Purchase of goods or equipment from the head office by the branch/subsidiary or from parties with special relations, to the subsidiary/branch or to the customer directly.
  • Intercompany activity or parties to a transaction that have a special relationship.
  • Income from provision of services between parties having that have a special relationship.
  • Loans (or other financing transactions) between parties that have special relationships.

In light of the increasing scrutiny of transfer pricing by the ITA, and especially as the BEPS requirements become applicable this year, it is prudent for companies operating in Israel to make sure they comply with the transfer pricing requirements. Our expertise, is available to assist companies meet the compliance requirements in a tax efficient and cost efficient manner. In light of the recent court losses, we have developed creative ways to overcome some of the most difficult transfer pricing issues.

In order to increase profits and reduce the exposure to business activity in Israel, we recommend that you receive full guidance before and during the transaction by our professional staff. Do not hesitate and contact us: tel-aviv.office@auren.co.il