Interview with: Henriette Fuchs, Senior Partner, manages the Tax Department in Tel Aviv

Pearl Cohen Zedek Latzer Baratz | View firm profile

Henriette Fuchs of Pearl Cohen explains the 2021 tax challenges for international groups with a presence in Israel

What do you see as the main tax challenges in 2021 for international taxpayers with a presence in Israel?

After a few years without major changes in tax legislation the acceptance of a number of amendment proposals of various important tax laws are expected which are of particular interest to multinational groups active in Israel. Among these are the tightening of transfer pricing rules, placing the burden of proof on the taxpayer under various chapters of tax law and regulations, and the

Which segments of your tax practice do you see growing in the next 12 months?

As the tightening of Israel’s transfer pricing regulations and the proposed CbC reporting rules may kick in shortly, the work and manpower involved with matters of intercompany business modelling to develop sharp multi-year transfer pricing strategies will take up even more of our attention.

International groups approach the senior functions in the Israeli tax authorities more often to obtain to certainty or even an advance pricing, bilateral, agreements to securing manageable Israeli tax positions and exclude uncontrollable tax risks. The tax authorities, during the last couple of years, have won a number of significant decisions in the international arena- this has resulted in a growing desire for the securing of certainty in advance. There is a will with the tax authorities to develop quicker and efficient responses to such requests, and that is where we fit in.

Another very important growth sector is that of indirect taxation and in particular value added tax – especially in the context of international – related party – transactions. The Israeli VAT system offers little bilateral reciprocity for cross border transactions, while at least 60% of the income of the Israeli treasury stems from customs, VAT and other indirect taxes. It is no surprise that the discussion about taxation of the digital economy by the OECD, and other global efforts against tax minimalization, have also captured the attention of the VAT authorities in Israel. The risk of VAT inefficiency can actually have a more significant economic impact on a business than any double income tax and we are therefore expanding our indirect tax capabilities.

How can clients help you limit the tax risks they need to manage?

The effect of the changed international tax perceptions and the translation of the Israeli tax authorities and policy makers specifically of these developments, bestow a very specific responsibility on the finance management of international groups who are looking to exclude quite present tax risks in relation to their activities in Israel. Our approach – when developing a long-term solid cross border tax strategy – entails full dialogue and we actually relies thereto on creative input of the finance and tax management of our clients.

Clients should make an inventory of the goal of their cross-border tax considerations, with a multi-year vision and include all intercompany business elements and relations, including the naming of existing tax risks, including – especially in relation to Israel – where is the IP in the group, where are the risks, how are employee equity awards charged to the Israeli group entity and what agreements are there and which are missing.

Where do you see the tax department of your firm in three years’ time when taking into account that clients are looking for stability and strategic direction?

The tax legislation in Israel offers many benefits and investment encouragement, whilst the tax system and tax authorities can be quite challenging in relation to foreign investors in a cross-border constellation. Our tax department has secured the best outcome through high day-to-day involvement with the international business modelling of its foreign and domestic clients.