How the Israel tax authorities are interpreting intergroup intangibles exports – ISRAEL TP CASE
Article by Henriette Fuchs (Pearl Cohen Zedek Latzer Baratz)
Unlike the taxing authorities in many other countries, the tax authorities of Israel – managing the tax system of one of the world’s leading innovation incubators – actively ‘patrol the border’ keeping a close watch on related-party transactionsIntra-Group Transactions are interactions between entities within the same multinational enterprise (MNE). Such transactions form the backbone of related-party dealings and are essential in managing global operations and aligning business objectives across jurisdictions. Understanding intra-group transactions is critical in international tax and transfer pricing, as they directly impact a company's tax obligations, profitability, and compliance standing. Tax professionals, accountants, lawyers,... that may involve intangibles.
Bolstered by the 2010 transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... guidelines of the OECD’s ‘changes in business models’, the Israel tax authorities (ITA) booked a first victory in 2017 at the district court in the case of Giteck. With the confidence gained from that case, the ITA then proceeded, in 2018, with the publication of a circular explaining when and how the export of values from (often typically IP-driven) Israeli companies can be identified and will be taxed. Circular 15/2018 focuses on international exports of functions, assets and risks (FARFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish...), and is especially aimed at taxing fleeing FARFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish... elements oftentimes following the acquisition of control in an Israel based company by a foreign investor.
In the Giteck case, the shares of an Israeli company were purchased in 2006 for some $90 million by Microsoft Corporation US. After its inception in 1992, Giteck had developed a piece of successful software (IP) used as its platform to provide automated technical support for manufacturers of electronic equipment. On the eve of the take-over by the Microsoft group, Giteck employed close to 150 staff supporting its customers and a small number running its IP. As often happens after acquisition by an MNEWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include..., Microsoft transferred Giteck’s staff to its local existing subsidiary, while Giteck – not long after – reported having sold its IP to the US Microsoft company at a price of $26.6 million.
Once the tax auditA Tax Audit is a comprehensive review or examination conducted by a government’s tax authority. The primary objective of a tax audit is to verify the accuracy of a taxpayer's financial records, tax returns, and overall tax compliance. This process ensures that the reported income, expenses, and deductions align with the applicable tax laws and regulations. Tax audits serve as... was launched, the ITA argued that because the most substantial asset of a technology company is its IP, Giteck’s income reported from the IP transaction should have been close to the $90 million paid for its shares. The court refereeing the dispute, after making its own detailed assessment of domestic transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... and relevant OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... guidelines, in particular rejected the ‘synergy’ argument raised by Giteck, explaining the higher share price paid by Microsoft included, inter alia, a significant appreciation of the expected benefits of Giteck’s joining the existing abilities of the Microsoft group. The honourable court believed that “value does not disappear or evaporate” and that Giteck had not succeeded in arguing why the total FARFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish... value in Giteck should not be equal the $90 million share price paid and the taxpayer had not succeeded in meeting the burden of proofThe burden of proof is a foundational principle in legal proceedings, requiring a party to demonstrate the truth of their assertions to the requisite standard of evidence. In tax law, the burden of proof often determines which party—typically the taxpayer or the revenue authority—must establish that a transaction, deduction, or tax position is justified. This principle ensures fairness and clarity....
In a similar case, after a two-year arbitration around an IP extraction following the acquisition of Israel-based Mercury Interactive by HP, HP agreed – in July 2017 – to pay an additional NIS 3.1 billion ($877 million) in tax in relation to the IP transaction after it had acquired the shares in Mercury for $4.5 billion. Initially, the ITA had actually demanded NIS 4 billion.
Recently, at the beginning of September 2019, the Israel Supreme Court also issued an intermediate decision in the district court-heard case regarding the Broadcom group and regarding the integration of its 2012 acquired Israeli subsidiary, Broadlight. After the Broadlight share purchase for $200 million, the Broadcom group chose to transfer the intellectual property and other assets out of Broadlight at a reported a price of $59.5 million for the IP. The tax authorities insisted that Broadlight’s research and development (R&D) and its marketing capabilities – in effect the balance of its FARFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish... – were also no longer with Broadlight. Broadlight insists that no transfer of economic ownership of the balance of the FARFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish... functions had taken place and showed two 2012 agreements by the companies to support the inter-company arrangement that governed the relationship between Broadlight and its related companies.
The district court, where the case is currently pending, supports the ITA’s claim that the tax assessor may actually re-classify the nature of the inter-company relationship regarding the relevant bits of Broadlight FARFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish..., and roll out the ‘anti-artificiality’ chapter of the Israel Tax Ordinance, section 86. This particular anti-avoidance tool allows the tax assessor to ignore the legal appearance of a transaction, or even a transaction altogether, when an economic base for the transaction – or for the way in which it was executed – is absent in his eyes. This is a surprising new use of section 86, in light of the fact that the purpose, goal and background of this piece of anti-abuse legislation bears no connection to transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... legislation and was born to redirect cases of apparent abuse. The Supreme Court, in an indirect way, did not halt the district court in supporting the tax assessor that the burden to disprove the impression of the tax assessor rests on the taxpayer absolving the tax assessor from having to prove why the contractual intentions of Broadlight are incorrect. Interestingly, the impact of this particular court supported discussion regarding classification of the transaction may, in the long run, backfire and actually limit the future freedom of the tax authorities to re-classify or classify certain agreements.
It is estimated that the ITA is running well over 20 pending FARFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish... discussions in connection with acquisitions that have occurred in recent years. Tax expertsA Tax Advisor is a professional who provides specialised advice to individuals, businesses, and organisations on various tax-related matters. They play a crucial role in guiding clients through complex tax laws and ensuring compliance with the latest regulations while identifying opportunities for tax efficiency. Tax Advisors must stay updated on legislative changes and understand the impact of international tax treaties,... accompanying multinationals acquiring control in Israeli companies confirm that a new perception of the share price negotiations is imperative, and that the highly uncertain outcome of a future gains tax discussion regarding relevant IP should be at the centre of the negotiating table. If not, the alternative is to leave the IP and other FARFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish... aspects of the acquired company untouched. This will often pose challenges from an implementation and technical perspective leaving finance management of the acquiring group with substantial tax uncertainties when re-classification of inter-company transactions is sprung upon them.
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