New transfer pricing reporting obligations under latest amendments to the Income Tax Ordinance and Income Tax Regulations
As part of the implementation of OECD’s BEPS (Base Erosion and Profit Shifting) program recommendations, and particularly BEPS Action 13 – “Transfer Pricing Documentation and Country-by-Country Reporting”, the legislator has recently published the new regulations under Section 85A of the Income Tax Ordinance (ITO), which together with the latest adoption of Amendment 261 to the ITO, significantly broaden transfer pricing reporting and recording obligations, with an aim to reduce profit shifting by multinational enterprises (MNEs) and assist tax authorities in carrying out transfer pricing assessments and audits.
Under Amendment 261 and the new regulations, taxpayers may be required to file 3 different reports – a Country-by-Country Report, a Master File and a Local File.
- Country-by-Country Report
An Israeli resident parent entity in an “International Group” shall be required to prepare and file a Country-by-Country Report if group’s annual revenue exceeds NIS 3.4 billion (or a lower threshold determined by the Minister of Finance).
The Country-by-Country Report includes information relating to the global allocation of the income, the taxes paid, and certain indicators of the location of economic activity among tax jurisdictions in which the MNE operates. The new regulations set additional requirements regarding the Country-by-Country Report.
- Master File
The Master File provides a high-level overview of the MNE’s business in order to place the MNE’s transfer pricing practices in their global economic, legal, financial and tax context and assist in evaluating the presence of significant transfer pricing risk. Under the new regulations, the threshold for preparing and filing the Master File is an annual group revenue of more than NIS 150 million during the tax year preceding the year for which such report is filed.
The Master File includes information regarding MNE’s organizational structure, description of the MNE’s business, MNE’s intangibles, MNE’s intercompany financial activities and MNE’s financial and tax positions.
- Local File
In contrast to the Master file, the Local file provides more detailed information relating to specific intercompany transactions. The information required in the Local File includes (among others) a detailed description of local entity’s structure, description of transactions the local entity was involved in and other financial information.
The new regulations expand current reporting and recording obligations and include (among others) a detailed description of local entity’s structure and a detailed list of all intercompany transactions. The new regulations shorten the period to submit such report from 60 days upon ITA’s request to 30 days.
As the new amendments apply to reports that should be submitted already for 2022 tax year, it is highly recommended to consult experienced legal and tax advisors and prepare in advance for the implementation of the new amendments.
For additional information please contact Adv. Oren Biran, partner and head of Tax department oren@gkh-law.com
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This alert is prepared as an informational service to clients and colleagues of Gross & Co. and the information presented is not intended to provide legal opinions or advice. Readers should seek professional legal advice regarding the matters about which they are particularly concerned.
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