Harmful Tax Practices – 2017 Peer Review Reports on the Exchange of Information on Tax Rulings

Israel

Israel has met all of the terms of reference (ToR) for the calendar year 2017 (year in review), except for the timely provision of information on rulings to the Competent Authority for exchange of information (ToR II.5.5), and the timely exchange of information on future rulings (ToR II.5.6). In the prior year peer review report, Israel received three recommendations regarding the identification of certain potential exchange jurisdictions for past rulings (ToR I.4.2.1), the timely exchange of information on past and future rulings (ToR II.5.6) and the exchange of information on new entrants to its IP regime (ToR I.4.1.3). Israel has addressed two of these recommendations and the recommendations for ToR I.4.2.1 and ToR I.4.1.3 have been removed, whilst the recommendation for ToR II.5.6 is retained. Israel is recommended to ensure that all information on future rulings is exchanged as soon as possible and to reduce the timelines for providing the information on future rulings to the Competent Authority.

Israel can legally issue five type of rulings within the scope of the transparency framework.

In practice, Israel issued 79 past rulings; for the period 1 April 2016 - 31 December 2016, Israel issued five future rulings; and for the year in review, Israel issued 16 future rulings within the scope of the transparency framework.1

Peer input received was received from one jurisdiction in respect of the exchanges of information on rulings received from Israel. The input was positive, noting that information on future rulings was complete, generally in the correct format and received in a timely manner.

1. Note: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Introduction

626.  This peer review covers Israel’s implementation of the BEPS Action 5 transparency framework for the year 2017. The report has four parts, each relating to a key part of the ToR. Each part is discussed in turn. A summary of recommendations is included at the end of this report.

A. The information gathering process

627.  Israel can legally issue all five types of ruling within the scope of the transparency framework: (1) rulings related to preferential regimes;1 (2) cross-border unilateral advance pricing agreements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles; (3) cross-border rulings giving a unilateral downward adjustment to the taxpayer’s taxable profits in the country giving the ruling; (4) permanent establishment rulings; and (5) related party conduit rulings. The Professional Division of the Israel Tax Authority is responsible for issuing rulings, with each department responsible for issuing a different category of ruling. Some rulings are published in anonymised form.2

Past rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1, I.4.2.2)

628.  For Israel, past rulings are any tax rulings within scope that are issued either: (i) on or after 1 January 2014 but before 1 April 2016; or (ii) on or after 1 January 2010 but before 1 January 2014, provided they were still in effect as at 1 January 2014.

629.  In the prior year peer review report, it was determined that the Israel met all the ToR for the information-gathering process except for identifying all potential exchange jurisdictions for past rulings (ToR I.4.2.1). In order to address this recommendation, Israel has put in place processes to ensure the identification of jurisdictions of residence of related party counterparts to transactions covered by the ruling or which gave rise to income from related parties benefitting from a preferential treatment. Furthermore, for permanent establishment rulings the department managers are instructed to identify the jurisdiction of the head office or the permanent establishment (as the case may be), and for conduit rulings department managers were instructed to identify the ultimate beneficial owner of payments made to the conduit.

Future rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1)

630.  For Israel, future rulings are any tax rulings within scope that are issued on or after 1 April 2016.

631.  In the prior year peer review report, it was determined that the Israel Tax Authority’s process to identify future rulings and all potential exchange jurisdictions was sufficient to meet the minimum standard. The Israel Tax Authority’s implementation in this regard remains unchanged, and therefore continues to meet the minimum standard.

Review and supervision mechanism (ToR I.4.3)

632.  In the prior year peer review report, it was determined that the Israel tax administration’s review and supervision mechanism was sufficient to meet the minimum standard. The Israel tax administration’s implementation in this regard remains unchanged, and therefore continues to meet the minimum standard.

Conclusion on section A

633.  Israel has met all of the ToR for the information gathering process and no recommendations are made.

B. The exchange of information

Legal basis for spontaneous exchange of information (ToR II.5.1, II.5.2)

634.  Israel has the necessary domestic legal basis to exchange information spontaneously. Israel notes that there are no legal or practical impediments that prevent the spontaneous exchange of information on rulings as contemplated in the Action 5 minimum standard.

635.  Israel is a party to international agreements permitting spontaneous exchange of information, including (i) the Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol (OECD/Council of Europe, 2011) (“the Convention”) and (ii) double tax agreements in force with 54 jurisdictions.3

Completion and exchange of templates (ToR II.5.3, II.5.4, II.5.5, II.5.6, II.5.7)

636.  Israel uses a combination of the internal FHTP suggested guidance and other internal quality assurance procedures for completing the summary section for information exchanged under the transparency framework.

637.  In the prior year peer review report, it was determined that the Israel Tax Authority’s completion and exchange of templates was sufficient to meet the minimum standard, except for the timely exchange of information on past and future rulings (ToR II.5.6). Israel received a recommendation to ensure the speedy exchange of all past and future rulings. Israel has now completed the exchange of past and future rulings that were delayed from the prior year peer review report. However, Israel has continued to experience delays in the exchange of future rulings issued in 2017. It is not known whether 16 future rulings issued in 2017 have been exchanged. Therefore, the recommendation for the timely exchange of information on future rulings is retained (ToR II.5.6). Furthermore, Israel experienced delays in the provision of rulings to the Competent Authority during the year in review. Rulings that were issued between July and December 2017 were not transmitted to the Competent Authority for exchange until January 2018. Therefore, Israel is recommended to reduce the timelines for providing the information on future rulings to the Competent Authority (ToR II.5.5).

638.  For the year in review, the timeliness of exchanges is as follows:

 

Past rulings in the scope of the transparency framework	Number of exchanges transmitted by 31 December 2017	Delayed exchanges
		Number of exchanges not transmitted by 31 December 2017	Reasons for the delays	Any other comments
	50	0	N/A	These relate to the delayed exchanges reported in the prior year peer review report and were exchanged in 2017.
Future rulings in the scope of the transparency framework	Number of exchanges transmitted within three months of the information becoming available to the competent authority or immediately after legal impediments have been lifted	Delayed exchanges
		Number of exchanges transmitted later than three months of the information on rulings becoming available to the competent authority	Reasons for the delays	Any other comments
	6	0	N/A	These relate to the delayed exchanges reported in the prior year peer review report and were exchanged in 2017. A further 16 rulings issued in 2017 have not yet been exchanged.
Total	56	0

 

Follow up requests received for exchange of the ruling	Number	Average time to provide response	Number of requests not answered
	0	N/A	N/A

Conclusion on section B

639.  Israel has the necessary legal framework and administrative processes in place for exchanging information on rulings. In the prior year peer review report, Israel received a recommendation regarding the timely exchange of information on past and future rulings (ToR II.5.6). Israel has continued to experience delays in the exchange of future rulings, and therefore Israel is recommended to ensure that all information on future rulings is exchanged as soon as possible. Furthermore, Israel experienced delays in the provision of rulings to the Competent Authority during the year in review, and is recommended to reduce the timelines for providing the information on future rulings to the Competent Authority (ToR II.5.5).

C. Statistics (ToR IV)

640.  The statistics for the year in review are as follows:

 

Category of ruling	Number of exchanges	Jurisdictions exchanged with
Rulings related to preferential regimes	29	France, India, Japan, Netherlands, Singapore, Sweden, Switzerland, United Kingdom, United States
Cross-border unilateral advance pricing arrangements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles	24	France, Germany, Japan, Netherlands, United Kingdom, United States
Cross-border rulings providing for a unilateral downward adjustment to the taxpayer’s taxable profits that is not directly reflected in the taxpayer’s financial / commercial accounts	0	N/A
Permanent establishment rulings	0	N/A
Related party conduit rulings	0	N/A
De minimis rule	3	N/A
IP regimes: total exchanges on taxpayers benefitting from the third category of IP assets, new entrants benefitting from grandfathered IP regimes; and taxpayers making use of the option to treat the nexus ratio as a rebuttable presumption	71	France, Netherlands, United Kingdom, United States
Total	56

1. These rulings are included in the category of preferential regime above.

D. Matters related to intellectual property regimes (ToR I.4.1.3)

641.  Israel offers two intellectual property regimes (“IP regime”) that are subject to transparency requirements under the Action 5 Report (OECD, 2015).4 It states that the identification of the benefitting taxpayers will occur as follows:

• New entrants benefitting from the grandfathered IP regime: this issue is relevant only for the grandfathering of the Preferred company regime. The benefits under this regime are only granted by way of ruling and new entrants are identified in the ruling process. New entrants for the purposes of the grandfathered Preferred company regime includes both new taxpayers not previously benefiting from the regime and new IP assets owned by taxpayers already benefiting from the regime. Up to the end of 2016, there were seven new entrants to the grandfathered IP regime. These were made available to the Competent Authority in September 2017 and exchanged immediately thereafter. Israel received a recommendation in the prior year peer review report because no information on new entrants benefitting from the grandfathered IP regime was exchanged during the year of review, although this information should have been available. Israel was recommended to ensure that information on new entrants to the grandfathered IP regime is swiftly made available to the Competent Authority for exchange of information in future. Israel notes that since the question on new entrants is relevant only to the previous version of the Preferred company regime law that was amended on 31 December 2016, there were no relevant new entrants during the year in review. Israel has now completed all exchanges of information on new entrants, and therefore this recommendation is removed.

• Third category of IP assets: In Israel, a third category of asset requires certification by the Authority for Technological Innovation (the certifying agency). For the year in review, the certifying agency notes that there were no companies which benefitted from the third category of IP assets. The Israel Tax Authority receives detailed information regarding the certificates issued by the certifying agency. Information regarding income from assets that were certified for third category assets will also be required in the company’s annual returns. Israel notes that as soon as the ECIL department issues a ruling regarding the third category of IP assets, they will be shared with the Competent Authority for exchange.

• Taxpayers making use of the option to treat the nexus ratio as a rebuttable presumption: not applicable as both regimes do not allow the nexus ratio to be treated as a rebuttable presumption.

Summary of recommendations on implementation of the transparency framework

 

Aspect of implementation of the transparency framework that should be improved	Recommendation for improvement
Israel experienced delays in the provision of rulings to the Competent Authority during the year in review.	Israel is recommended to reduce the timelines for providing the information on future rulings to the Competent Authority.
Israel encountered delays in the exchange of information for all future rulings issued in 2017 within the scope of the transparency framework issues. This is a continuing recommendation from the prior year peer review.	Israel is recommended to ensure that all information on future rulings is exchanged as soon as possible.

References

OECD (2017), BEPS Action 5 on Harmful Tax Practices – Terms of Reference and Methodology for the Conduct of the Peer Reviews of the Action 5 Transparency Framework, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris. www.oecd.org/tax/beps/beps-action-5-harmful-tax-practices-peer-review-transparencyframework.pdf.

OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://doi.org/10.1787/9789264241190-en.

OECD/Council of Europe (2011), The Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264115606-en.

Notes

← 1.  Preferred company regime and Preferred technological enterprise regime

← 2.  Available at: https://taxes.gov.il/Pages/TaxationDecisions/TaxationDecisions.aspx (accessed 19 November 2018).

← 3.  Austria, Belarus, Belgium, Brazil, Bulgaria, Canada, China (People’s Republic of), Croatia, Czech Republic, Denmark, Estonia, Ethiopia, Finland, France, Georgia, Germany, Greece, Hungary, India, Ireland, Italy, Jamaica, Japan, Korea, Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Netherlands, Norway, Panama, Philippines, Poland, Portugal, Romania, Russia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Chinese Taipei, Thailand, Turkey, Ukraine, United Kingdom, United States, Uzbekistan and Viet Nam.

← 4.  The Preferred company regime which is the grandfathered regime, and the Preferred technological enterprise regime which is the amended regime.