Transfer Pricing Reporting and Documentation Obligations in Israel – A Complete Guide

Documentation and reporting are fundamental pillars of transfer pricing compliance. Without proper documentation, a company may struggle to demonstrate adherence to the arm’s length principle. Clear reporting and documentation obligations exist in Israel and numerous countries worldwide. A thorough understanding of these obligations is essential for compliance. This article provides a comprehensive overview of transfer pricing reporting and documentation obligations in Israel.

The Three-Tiered Approach to Documentation

In most countries, transfer pricing documentation follows the three-tiered approach introduced by the OECD. This framework was established under the BEPS (Base Erosion and Profit Shifting) project. It prescribes documentation obligations that scale with the multinational group’s consolidated revenues.

The three tiers are:

1. Local File, also referred to as a transfer pricing study or market conditions analysis.
2. Master File.
3. Country-by-Country Report (CbCR).

What is a Local File (Transfer Pricing Study)?

The first tier of documentation is the Local File. It is the most relevant to most companies. In Israel, this is commonly known as a transfer pricing study or market conditions analysis. This document focuses on cross-border transactions between the Israeli entity and its related foreign parties.

Its purpose is to provide detailed information on these transactions. The focus is on their pricing methodology. While the document includes certain information about the broader group structure, its primary emphasis remains on the specific transactions of the local entity.

In Israel, the required content of a transfer pricing study is based on OECD guidelines. It is detailed in the Israeli Income Tax Regulations for Determining Arm’s Length Conditions.

Globally, various threshold values exist for the obligation to prepare a Local File. Not every company conducting international transactions is required to prepare one. However, in Israel, the obligation to prepare a transfer pricing study applies to every international transaction between related parties. This applies even if the transaction value is relatively low.

In most countries, there is no obligation to submit the study automatically with the annual tax return. Submission is required only following a specific request from the tax authority. In such cases, the document must be provided within a predefined timeframe. This typically ranges between 30 and 90 days. In Israel, the study must be submitted to the Israeli Tax Authority within 30 days of receiving a request.

Master File

The Master File focuses on the activities of the multinational group as a whole. Its purpose is to provide a comprehensive overview of the group’s business operations. This includes a description of the group’s transfer pricing policies, principal profit drivers and intangible assets portfolio. It also includes additional relevant information.

The obligation to prepare a Master File generally applies to relatively large corporate groups. Small and medium-sized enterprises are typically exempt. In Israel, the Master File obligation was introduced under Amendment 261 to the Israeli Income Tax Ordinance. Effective from the 2022 tax year, an Israeli company that is part of a multinational group is required to prepare this documentation. This applies if the group’s revenues reached 150 million NIS or more in the preceding year.

Similar to the Local File, most countries do not require automatic submission of the Master File. Submission is required only upon request from the tax authority. This is also the case in Israel.

Country-by-Country Report (CbCR)

CbCR represents the highest level of documentation. It is relevant to very large multinational groups. Its purpose is to provide tax authorities with comprehensive information on the distribution of revenues, profits, taxes paid and economic activities. This information covers all group entities across all countries. Unlike the Local File and Master File, the CbCR must be filed annually.

Most OECD member countries adopted the CbCR filing obligation in 2016. In Israel, the obligation was introduced under Amendment 261 to the Israeli Income Tax Ordinance. It applies effectively from the 2022 tax year.

Groups with consolidated revenues of 750 million EUR or more (or an equivalent amount in the local currency) are generally required to file the report. Filing occurs in the countries of the group’s ultimate parent entity. In Israel, if the ultimate parent entity is an Israeli tax resident and group revenues exceed 3.4 billion NIS, a filing obligation in Israel applies.

Documentation Obligations – Summary Table

Additional Documentation Obligations

Beyond the three-tiered documentation framework, companies are required to maintain supplementary supporting documentation. This is necessary to substantiate compliance with the arm’s length principle. Such documentation includes intercompany agreements, invoices, and any other documents relevant to transaction pricing. Maintaining these documents is crucial to substantiate compliance before the Israeli Tax Authority when required.

Reporting in Annual Tax Returns

In addition to documentation obligations, companies are typically required to provide information about intercompany transactions. This information is included in their annual tax returns submitted to tax authorities.

In Israel, the following forms must be attached to the annual tax return, as applicable:

• Form 1385 – Declaration of International Transactions. Companies and individuals with transactions involving related foreign parties must file this form. The form includes information about the transaction and its pricing.
• Form 1485 – Declaration Regarding Loans in International Transactions. Companies that elected to issue capital notes to related companies pursuant to Section 85A(6) must file this form.
• Form 1585 – Declaration of Affiliation with a Multinational Group. Companies that are part of a multinational group (as defined in Section 85A) are required to declare this status. They must also provide details about the group.
• Form 1686 – Country-by-Country Report (CbCR) pursuant to Section 85C(3) of the Israeli Income Tax Ordinance. This form is filed by Israeli ultimate parent entities of multinational groups. It applies to groups with revenues of 3.4 billion NIS or more.

Practical Example – ABC Group

ABC Group is a multinational group operating in 20 countries worldwide. Its consolidated revenues amount to 5 billion NIS. Israeli company abc heads the group and serves as the ultimate parent entity. British company XYZ and American company INC provide distribution services to it.

What documents and forms will ABC Group need to prepare and file in Israel?

First, abc Company must prepare a transfer pricing study. This study addresses the distribution services provided to it by XYZ and INC.

Additionally, because its revenues exceed 150 million NIS, it must also prepare a Master File.

Finally, since the group’s revenues exceed 3.4 billion NIS and the ultimate parent entity is an Israeli tax resident, the company must prepare and file a Country-by-Country Report.

Regarding the forms abc Company must attach to its annual tax return:

1. Form 1385 – for transactions with XYZ and INC.
2. Form 1585 – To report its classification as a multinational group.
3. Form 1686 – to file the Country-by-Country Report.

Companies engaged in cross-border-related-party transactions must ensure full compliance with the arm’s length principle. They must price transactions at market conditions. Proper documentation and reporting as required by law are essential. Non-compliance with these obligations may result in administrative penalties. It may also create a heightened burden of proof before the tax authorities and substantial tax exposure.

Nimrod Yaron & Co. – Israeli and International Taxation specializes in transfer pricing. The firm provides comprehensive professional support for all transfer pricing matters. To contact a representative from our firm, click here.

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