The Israel Tax Authority (ITA) has released guidelines and Technical instructions for the filing of Country-by-Country (CbC) reports. Multi-National Enterprise (MNE) groups with a combined revenue of ILS 3.4 billion and above, starting from the 2022 fiscal year, must comply with this reporting requirement and submit their CbC reports within 12 months of the end of the year. In addition, companies need to file their CbC report for the 2021 fiscal year by March 31, 2023. To file a Country-by-Country (CbC) report in Israel, companies must register in the HMA portal for automatic exchange of information.
In December 2022, the tax authority updated Form 1385 which requires taxpayers to disclose details about their cross-border related party transactions. The revised form features a new checkbox format and a requirement for a signed statement confirming that the transactions are conducted at a fair market value as stated in section 85A of the Income Tax Act and the Israeli transfer pricing rules. This update puts emphasis on the declaration of transfer pricing documentation accuracy and is expected to increase scrutiny from the ITA.
The ITA may impose a deficit penalty of 15% on the additional tax assessed for an international transaction that does not comply with the provisions of section 85A and the taxpayer has marked on Form 1385 that transfer pricing documentation was not prepared in accordance with regulation 5 at the time of filing their tax return, but still signed the declaration. This may be considered as a form of negligence.
