Miracle in the Holy Land
Chanukah and Christmas – which coincide this year – are both, in their distinct ways, about miracles that took place within theoretical walking distance of where I am now sitting. Another miracle that took place last week would have needed the car – the Lod District Court ruled against the Israel Tax Authority (ITA) in, what should become, a landmark case.
That doesn’t happen often. The tax authorities are normally clever enough to strong-arm a compromise on issues where they are not steady on their feet, so that a large proportion of the cases that come to court are no-brainers to the detriment of the little man (who was just wasting his money and everybody’s time).
What was doubly miraculous about this case was that it involved a real multinational group (not like the open and shut case a few years ago involving a holding company in Holland that produced directors’ meetings minutes in Hebrew). From experience, multinationals don’t run to court. A combination of maintaining good relations with the government and its offshoots who provide handsome incentives for investment in Israel, the small amounts of money involved looked at globally, and the geographical complications of pursuing a case from thousands of miles away, encourage the good old compromise – paying to make the ‘problem’ go away.
Not this time. The case involved an international business restructuring ie moving activities around within an international group. The group is involved (successfully) in something incomprehensible (to me) to do with Broadband technology. The previously independent Israeli subsidiary licensed its intellectual property to a foreign group company (not strictly corporate restructuring, but the tax authorities thought it was), signed a cost-plus agreement with another group company for marketing services, and signed another cost-plus agreement with its parent company for R&D services. The business had changed.
The tax authorities waded in with their hot-off-the-press professional circular from 2018 on Multinational Enterprise Business Restructuring, the 34 pages of which most of the time boil down to a simple message: if an Israeli company is part of an MNE (multinational enterprise) which enters into business restructuring, changing the Israeli company’s business model, expect a capital gains tax bill for transferring part of the business abroad. The ostensible basis for their position was the OECD’s mammoth ongoing Base Erosion and Profit Shifting project, and specifically its ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017’, together with a recent Israeli court case.
If there is one word that comes to mind in all OECD professional announcements it is ‘nuance’. There is seldom an absolute conclusion that applies in all cases. The ITA appeared to miss that point. Fortunately, the judge seems to have had a better grasp of what the OECD was not saying, as well as an infinitely better grasp of the recent court case the ITA was referring to – after all, he was the judge on that case, too.
The MNE won the case and the ITA was ordered to pay costs.
Although the case has been clearly decided correctly, it is worrying. If it deserved to come to court at all, the arguments should have been different – more ‘nuanced’. Instead, it was left for the judge to give a lesson in OECD guidelines and pure logic, which is not his job.
It can only be hoped that this will prove a sobering experience for the professionals at the ITA, which will serve to raise the bar in transfer pricing disputes going forward.
Miracles do happen (sometimes).
Happy Chanukah and Merry Christmas