Transfer-pricing changes for multinational groups - opinion

The amendment grants the director of the Income Tax Authority (ITA) broad new powers to demand information about multinational groups, Israeli and foreign.

 Illustrative image of doing taxes. (photo credit: PXHERE)
Illustrative image of doing taxes.
(photo credit: PXHERE)

A new amendment (No. 231) to the Income Tax Ordinance aims to tighten up transfer-pricing rules in Israel for multinational groups. The amendment grants the director of the Income Tax Authority (ITA) broad new powers to demand information about multinational groups, Israeli and foreign. We await additional details. The amendment was passed by the Knesset before it dissolved and was published on July 5.

Current Israeli rules

Israel has transfer-pricing rules that require the use of arm’s-length (market-based) terms and transfer-pricing studies with respect to cross-border transactions between related parties (50% or more control of one party over another or by a common third party).

Transfer-pricing studies must be prepared and be available for inspection by the ITA within 60 days of any request.

Each year, the taxpayer must attach a signed declaration (Form 1385) that related-party transactions are indeed on market terms.

Calculating taxes (credit: INGIMAGE)Calculating taxes (credit: INGIMAGE)

The regulations require a transfer-pricing study to be prepared to check the transfer pricing, applying a prescribed method. The regulations are generally considered a hybrid mixture of OECD transfer-pricing guidelines and US Section 482 transfer-pricing regulations.

The prescribed methods in Israel, in order of preference, are:

  • Comparable uncontrolled price (CUP) method – applying the price in other comparable transactions
  • Rate of profitability OR profit split – having regard to contribution of each party (functions), assets and risks.

Another appropriate method

In the comparison, the taxpayer’s pricing is generally considered arm’s length if it falls within the interquartile range. If a non-arm’s-length price is used, the median price may be substituted. Comparable data should go back no more than three prior years.

No specific penalties are prescribed, but there are penalties for incomplete tax returns.

The ITA has issued a controversial Circular 1/2020 that says if a transfer-pricing study fails to provide a convincing explanation why the profit-split method (PSM) was not adopted, the ITA can instead issue a “best judgment” tax assessment based on estimates and personal experience of the ITA.

What is changing?

Israel is a member of the OECD, but it has been slow to adopt newer OECD documentary recommendations since 2015. The Knesset amendment now enables their adoption.

The enabling legislation:

First, an Israeli resident ultimate parent company (UPE) with revenues over NIS 3.4 billion in the preceding year (or less if the finance minister and Knesset Finance Committee prescribe) shall file an online report containing information to be stipulated by the ITA director about the multinational group and its activity in each country for the entire tax year, within a year after the end of the year concerned.

A UPE is required to prepare consolidated financial statements, or would be if it were listed on a stock exchange.

In addition, the finance minister and Knesset Finance Committee may pass regulations compelling an Israeli resident company in a (presumably foreign) multinational group to file such an online report.

The online reports would presumably reflect the newer OECD documentary requirements.

Newer OECD documentary requirements:

First, the OECD recommends a “Master File” that provides a description of global operations of the multinational group. Second, the OECD recommends a “Local File” that contains detailed information about the local country (i.e., Israel). Last, but not least, the OECD recommends a “Country by Country” (CbC) report revealing details in spreadsheet format about the group’s global operations, including offshore operations.


The ITA director has yet to publish online forms, content and filing procedures. And regulations applicable to Israeli companies in foreign groups have yet to be passed. It is not clear whether the November 1 election in Israel will slow things down, or whether the ITA will get such information anyway from other countries under various international treaties.

Transfer-pricing studies are typically filed in English. But will online forms be in Hebrew or English? If in Hebrew, can a spreadsheet in English be uploaded? Will the ITA share such data with the tax authorities of other countries in English?

More importantly, the ITA will soon know far more about what a group has in other countries, especially offshore. A wave of tax audits may then perhaps follow. In any tax audit, we expect the possibility of imposing the profit-split method to be at the top of the ITA’s agenda, e.g., if people are employed in Israel but technology or brands are located offshore.

As always, consult experienced legal and tax advisers in each country at an early stage in specific cases.

[email protected]

[email protected]

Leon Harris is a certified public accountant at Harris Horoviz Consulting & Tax Ltd.

Oren Biran, advocate, is a partner and head of the tax department at Gross GKH Law Firm.