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Before handling any transfer pricing exposure, we evaluate and assess the true nature of the exposure and its scope. This is important in order to figure out where (and indeed whether) the true exposure lies. It is important to note that companies operating without the required documentation (mainly a transfer pricing study and an applicable intercompany agreement) are exposed according to Israeli (as well as other) law and regulations. An intercompany agreement in itself will not suffice.
The most common intercompany transactions are marketing and distribution subsidiaries, granting loans and other forms of intercompany finance, providing management services, granting rights to use IP or other intangibles (such as patents, brand name, copyrights, reputations), etc. Each such transaction has to be documented according to applicable law, in order to demonstrate to the tax authorities that the transaction is priced at “arm’s length”.
Sometimes, corporations perform their intercompany transactions based upon previously issued studies or an advice they have received from their accountants to work at a “cost plus X%”. This is not sufficient. Such a decision has to be supported, in terms of methodology and amount of overhead, by a proper transfer pricing study, and it has to be updated each financial year.
Where the corporation has already adopted a transfer pricing policy or method which it has applied outside of Israel, the method and the outcome of such policy have to be supported by an Israeli applicable study and intercompany agreement.