MAP is short for “mutual agreement procedure” under a tax treaty. Israel has 54 tax treaties and more on the way. In 2015 the OECD published recommendations to governments for addressing base erosion and profit shifting (BEPS). The aim is to prevent offshore tax planning by multinational groups, especially regarding intercompany transfer pricing. But the OECD was worried about overkill – too many government taxing the same profits. So the OECD recommended (in Action report 14) making it easy for multinational groups to invoke MAP appeal clauses in tax treaties.
And to make sure, the OECD started conducting “peer reviews”. That means the OECD sends tax officials from various countries to audit other tax authorities’ approach to MAP and then publish their findings. Hence the MAP peer review report just published by the OECD on the Israeli Tax Authority (ITA).
What did the OECD find when it audited the ITA’s MAP procedures?
To be fair to the ITA, it came out with a pass grade, but it got caught out in a few places. The OECD peer review inspectors reviewed the two years 2016 and 2017.
Who were the peers? The OECD says that tax officials from eight peer countries provided input: Canada, the People’s Republic of China, Germany, the Russian Federation, Sweden, Switzerland, Turkey and the United States. Input was also received from one unnamed taxpayer.
On the plus side, the OECD says: Israel meets the main requirements in relation to the resolution of MAP cases. Israel’s competent authority (the ITA’s international tax division operates fully independently from the audit function of other ITA departments and adopts a co-operative approach to resolve MAP cases. It is prepared to make retroactive transfer pricing adjustments (known as roll-backs) although it hasn’t had to so far. The OECD says the organization is adequate and Israel does not use any inappropriate performance indicators (such as more salary for more tax). And Israel also meets the OECD’s minimum standard as regards the implementation of MAP agreements. This is done by applying tax treaties and the BEPS multilateral instrument (MLI) which builds in treaty override clauses where agreed.
So is all hunky dory at the ITA?
Not quite. The ITA came in for embarrassing criticism in a couple of areas.
First, the ITA was a bit slick. The ITA sometimes considers MAP requests unjustified but claims it still notifies the other country’s tax authority. However, the procedure is apparently not well documented.
Moreover, one peer country moaned it merely received a notification from the ITA in December 2017 regarding several MAP requests which the ITA claimed were not justified. This peer said it was not clear when the MAP requests were submitted to the ITA, which tax years were concerned, how many taxpayers submitted the requests or who the taxpayers were.
Second, the ITA is not exactly speed. The OECD aims for MAP cases to be resolved in average within 24 months. In Israel’s case in 2016 and 2016 the ITA claimed the median average time to close MAP cases in 2016-2017 was 22.19 months. However, the OECD checked and found that the ITA actually took 33.6 months on average in that period. When asked about this, the ITA blamed the taxpayers for not providing documentation and information, complexity and the need for extensive translations.
Our own experience of ITA negotiations indicates it is a large organization where some officials are keen to provide fast service, others unfortunately cannot be found for months on end, and when found, they ask questions to buy time. The solution is, of course, to go in prepared and apply schmooze. Language is generally not a problem if the language is English.
As always, consult experienced tax advisors in each country at an early stage in specific cases.