Israel considers requiring taxpayers to pay disputed tax or transfer pricing assessments pending appeal

By Jacky Houlie, JH & Co. Law Office and Shlomo Hubscher JH Consulting Ltd., Tel Aviv-Yafo, Israel

The Israeli tax authorities are examining the possibility of changing the law, requiring immediate tax collection if a taxpayer appeals a tax or transfer pricing controversy in district court.

Under Israel’s current legal structure, a tax payment in the case of a tax appeal is only charged subject to and after a district court decision or a settlement agreement between the taxpayer and the tax authority.

However, the Israeli tax authorities are now considering applying the “Italian model,” according to which a taxpayer must pay (at least) a partial tax upfront in the event a dispute appealed to the district court (i.e., after issuing orders by the Israeli Tax Authority in stage B of the hearing).

It has yet to be determined whether the proposed legislative change will require the taxpayer to pay all or part of the disputed tax with the possibility of a deferment request for the remaining portion.

This potential change is even more specifically poignant regarding transfer pricing disputes as they are bilateral, concerning both the Israeli taxpayer and a taxpayer in another jurisdiction.

If the tax authority in the non-Israeli jurisdiction determines that a settlement arrangement that was “forced” on the taxpayer (e.g., due to economic hardship) does not match the market conditions of the transaction, the other tax authority will challenge the taxpayer’s settlement.

This may lead to denial of corresponding adjustments and undue double taxation.

The Israeli tax authorities’ position likely stems from recent budget and collection difficulties caused by the Covid-19 crisis, considering the fact that legal proceedings often take several years.It should be emphasized that this issue is still being examined by the Israeli tax authorities; a final decision has not yet been passed by the Knesset (Israeli parliament).

Nevertheless, the proposal has already drawn much criticism. The heavy and unreasonable economic pressure created by this change could force a taxpayer to accept a settlement rather than appeal to district courts, even if the taxpayers is confident of its position from a legal and economic perspective.

In our view, the proposal is unbalanced and contradicts the Basic Laws of the State of Israel. This includes a violation of Article 8 of Israel’s Law of Human Dignity and Liberty (which is a constitutional law), that states that infringement of property rights will be done only by a law which follows the national values ​​of the State of Israel, intended for a proper purpose, and to an extent that does not exceed what is required.

– Jacky Houlie is founder/Managing Partner at JH & Co. Law Office.

– Shlomo Hubscher is a partner at JH Consulting Ltd.