Tax Alert No.35 - 

International taxation  10.11.2019

Transfer pricing: What to declare to the Tax Authority – a new form in your tax return - 10.11.2019

Lately, the Israeli Tax Authority published a new form – Declaration of International Transaction that comes as an appendix to the annual tax return. The form serves the Tax Authority in identifying and addressing international transactions where related parties are involved. The form combines the Israeli tax legislation concerning transfer pricing and the Tax Authority’s circulars reflecting its position on the subject.

The Tax Authority previously published two income tax circulars on transfer pricing:

  • Circular 11/2018 addresses operations related to high – risk distribution (comprehensive distribution), low-risk distribution and marketing activity with cost margin pricing.

  • Circular 12/2018 establishes a “green channel” for cases within the profitability range set by the Tax Authority, whereby those meeting the criteria obtain a relief from the reporting requirements (market research). The latter addresses activity related to low-risk distribution, marketing activity with cost margin pricing as well as service with low added value.

When filling out the new form, explicit indication of whether or not the circular applies is made by checking off one box from several options. By  indicating that the circular applies, the taxpayer is exempt from the need to perform a full market survey. Accordingly, explicit indication is necessary showing whether the transaction price meets the terms of the circular as per the selected method (low value services, marketing services or distribution services) – this is a fixed list in which one box must be selected to indicate whether or not the instructions of the circular have been carried out. With regards to the transaction details, the following descriptions are required:

  1. Transaction description. For the sake of clarity an indication must be made whether the transaction is income or expenditure.

  2. Method employed. In the previous form the method was not indicated in a separate category but as part of the transaction price in the comments section. It seems that the Tax Authority wishes to ascertain that the taxpayer submitting the return declares that transfer pricing regulations have been carried out.

  3. Profitability rate. The taxpayer must declare whether the market research terms have been met as per the transfer pricing regulations.

  4. Transaction amount. The words “as indicated in financial reports” have been added as a note – the need to cross – validate reporting in the form with the financial reports is an outcome of, inter alia, Supreme Court Case regarding stock options for employees of Israeli enterprises that report using the cost plus method.

To sum things up – the standard of reporting, the reliance on the financial report and the responsibility of the person submitting the report has jumped up a level, in particular where the submitter must determine a priori for certain transactions whether or not the conditions of the circulars are met, a determination which is sometimes subject to interpretation.

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