Worldwide transfer pricing reference guide 2014

Israel
Taxing authority and tax law
Taxing authority: Israeli Tax Authority (ITA) is responsible for ensuring that taxpayers meet the requirements of the law.
Tax law: Income Tax Ordinance §85A and Income Tax Regulations (Determination of Market Terms), 2006 provide guidance on
transfer pricing.
Relevant regulations and rulings
The ITA Income Tax Regulations (Determination of Market Terms) were drafted pursuant to §85A of the Israeli Income Tax Ordinance.
Final regulations were adopted in November 2006. The Israeli Transfer Pricing (ITP) Regulations apply to all international intercompany
transactions carried out subsequent to the validation of regulations on 29 November 2006. The ITP Regulations are based on a
combination of the OECD Guidelines and the US transfer pricing regulations.
In Israel, taxpayers are required to comply with the proper timing for submission of documentation (i.e., 60 days from the official demand
of a tax inspector), which shifts the burden of proof to the taxing authority if the latter challenges the transfer pricing.
The ITP regulations require that, commencing with tax year 2007; Israeli annual tax returns include a form (#1385) specific to transfer
pricing that identifies the intercompany transactions, details of the other party and its residency, the transaction volume and a signature
on a declaration that the international intercompany transaction is at arm’s length. According to the taxing authority, such declaration
must be supported by documentation that meets the documentation requirements.
In the last few years, the ITA has released several publications on various issues that affect transfer pricing:
• Restructuring — The ITA provides guidance to its local assessing officers on how to deal with post-acquisition restructuring and
intellectual property (IP) migration following such restructuring
• Capital notes — Capital notes enable Israeli taxpayers to finance their foreign subsidiaries with non-interest financial debt instruments
• Inclusion of stock option expenses by Israeli cost plus companies — The ITA asserts that these expenses should be included, and points
out that two cases addressing this issue are currently being litigated
OECD Guidelines treatment
The ITA considers its transfer pricing rules and regulations to be consistent with the OECD Guidelines. However, usually a local adaptation
is necessary, mainly with respect to the interquartile range when the CUP method is used, and the decision of whether to use local,
European or US comparables. Israel also adopts a combination of hierarchy and best method selection, where CUP is the superior
method and the rest are secondary to CUP but equally so.
Priorities/pricing methods
To determine whether an international transaction is at arm’s length, the ITP Regulations require the taxpayer to apply one of the
following methods, in order of preference:
• CUP or CUT
• Comparable profitability
• Cost plus or Resale Price
• CPM or TNMM
• Profit Split
• Other methods
An international transaction is at arm’s length if, through the application of the selected method, the result falls within a defined
interquartile range.
As an exception, the entire range of values will apply when the transfer pricing method applicable is a CUP or CUT, and no adjustments
are performed. If the international transaction’s result is outside the range, the median should be applied as the arm’s length price for
the transaction.
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