Israel passes Country by Country Reporting into law

International Tax Update

July 7, 2022

Yesterday also Israel now has accepted the Country by Country Reporting (“CbCR”) and the obligations for certain companies to maintain and file a Masterfile for transfer pricing reporting purposes into law. By publication of amendment # 261 to the Income Tax Ordinance 1961 (“ITO”) in Israel’s national Gazette the CbC related amendments became a reality in Israel and effective as per reporting year 2022.

Amendment 261 (named “Reporting of Parent Entities of Multinational Groups”) expands Israel’s transfer pricing legislation, previously existing merely of Sec 85A of the ITO into the BEPS realm. A new Section 85 B to the ITO deals with “documentation” and a new Section 85 C to the same law establishes the CbC reporting requirements that apply to a qualifying Israel resident parent company of a multinational group.

A master file should be prepared for any group of companies with a presence in Israel and a group revenue at least NIS 150 million ($45 million approx.)

An Israel resident company which functions as the ultimate parent of a multinational group of which the consolidated turnover is in excess of 3.4 billion shekels ($ 1.1 B) should submit a country by country report.

The set of annual (corporate tax) reporting forms will – starting reporting year 2022 – contain an updated version of the existing (transfer pricing) form, Form 1385. The Form shall, going forward, reflect the requirements for declarations as to a master file and relevant CbCR positions. Note that the status of the Form is that of an integral inseparable part of a company’s reporting obligations and that when management should forget the form or report incorrectly, this may have repercussions for the management who signed the Form, or who did not see to have it included when required

Parliament of Israel (the ‘Knesset’) published the passing into law of Amendment 261 on 6 July 2022.

Explanatory notes from the tax authorities on December 18 2022.

Then in December 2022 the professional department of the Israel Tax Authority (“ITA”) sent out a short explanatory note to the registe- red representatives* of tax-payers maintaining tax files in Israel regarding initial explanations pertaining to some of the practical implementation of the Country by Country reporting requirements (“CbC”) by tax payers to whom the requirements apply.

After Amendment 261 to the Income Tax Ordinance the expansion of the Income Tax Regulations (Determination of Market Conditions) 5766-2006, an Israel resident company at the top of a multinational group with a consolidated turn-over of over NIS 3.4 billion (close to U$ 100B) must submit required materials regarding all entities in its’ group beginning with the 2022 within 12 months from the end of the tax year. The ITA will then transmit the CbC data required to foreign tax authorities in the framework of the automatic exchange of information.

The ITA instructs that an annual report an XML file) be filed online containing financial data and nature of business information, regarding all entities in the Group. These data will be transferred in ‘automatic exchange’ to other countries where entities of the group are, but only to reciprocating countries. An Israel based parent company of a qualifying group may file the required CbC report in another relevant country, provided the company notifies by the end of the relevant tax year that it will use this option. A parent entity in Israel is also given the choice the interested to already notify by 31-03-2023 that a CbC report regarding 2021 (by choice) has been filed already in another country.

An Israel resident entity which belongs to a CbC qualifying multina- tional group, but is not the top company of the group, will report to the Israel Tax Authority, tax year starting regarding the tax year 2022 in which country the group has submitted its report. To this end, Form 1585, which is in the making, shall become an integral part of the required materials for filing an annual tax report. Note that the non-filing of the Form may render the annual tax filings incomplete and hence unprotected by statute of limitations and personal liability of the corporate functions and persons held responsible for the complete filing of the annual tax returns. Part of the Forms need also be reported via a designated email.

An Israel resident entity which is not the final parent entity in the filing ()local multinational group will report in which country the multinational group’s report was submitted (along with identifying details including: entity name ,entity number, multi- national group name, name of the final parent entity and tax identification number (and contact details) to IsraelCBCrLFN@taxes.gov.il

If there are several Israeli resident entities belonging to the same group, they can be reported about in one filing. Detailed further instructions for filling out the required CbC reports are expected to be published shorty.

In case you have any questions regarding transfer pricing or international tax matters please feel free to approach us   

*.. Officially registered licensed “representatives of tax payers” of whom the identity is maintained in a data base of the ITA