Is the OECD Amount B treaty second-rate for Israeli distributors?

 

Your Taxes | New OECD model tax treaty aims to streamline profit calculations for related-party imports, but Israel's status as non-covered jurisdiction raises questions.

By LEON HARRIS JANUARY 23, 2025 18:33 Updated: JANUARY 23, 2025 18:34

Illustration of Israeli shekels, September 24, 2023 (photo credit: HADAR YOUAVIAN/FLASH90)

The OECD has published a model tax treaty to fix the taxable profit of companies that import physical goods from a related foreign supplier. Much international trade is done this way.

The model treaty issued last September is known as the “Model Competent Authority Agreement on the Application of the Simplified and Streamlined Approach.”

The taxable profit, oddly called “Amount B,” is part of Pillar 1 in the OECD’s two-pillar plan to tax the digital economy.

Unfortunately, Amount B does not fit in well with the new Israeli “trapped profits” amendment, as explained below.

About Amount B: The Amount B “simplified and streamlined approach” is a quick way of assessing the arm’s-length taxable profit of importers. It takes account of the sector, the operating expenses, and the sovereign risk of the country concerned.

Thousands of additional shekels can be saved every year with tax exemption (credit: SHUTTERSTOCK)

The computerized process takes seconds, which is a lot faster than traditional transfer-pricing studies. Detailed rules apply, however, and the calculations are complex.

About the model agreement: The model agreement helps provide a legal basis for the speedy Amount B calculation. But it takes two to tango. So, if the importing country accepts the resulting transfer price, the model agreement also helps the export country accept the corresponding transfer price at its end.

The agreement says if the simplified and streamlined approach is used, the Amount B return for qualifying transactions will be treated as providing an acceptable approximation of an “arm’s-length” (market-based) outcome.

Also, the applicable upper percentage limit of the operating expenses-to-net revenues criterion should be agreed upon by the countries concerned. Advertisement

The export country’s competent tax authority should accept the Amount B outcome if the import country’s tax authority verifies the relevant conditions have been met and the relevant rules have been applied.

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Any such agreement will apply to qualifying transactions on or after January 1, 2025, or the month after both countries sign off if it is later.

In the event of a dispute, the competent tax authorities will apply the Amount B guidance to endeavor to resolve the case by mutual agreement. But no backup procedure is provided if they don’t agree.

In which countries does Amount B apply?

Currently, only about 66 countries are signed up as “covered jurisdictions,” including Mexico, South Africa, Ukraine, Vietnam, and mainly developing countries. The EU and most other affluent Western countries are not covered jurisdictions. However, the US Treasury and the IRS have announced their intention to issue proposed regulations on Amount B.

In the meantime, the OECD says that about 147 countries in the OECD’s “Inclusive Framework” should respect the outcome when such an approach is applied by a “covered jurisdiction” where a bilateral tax treaty exists.

Also, the OECD says such an agreement is optional and does not impede the use of “other means” (presumably transfer-pricing studies or individual taxpayer agreements) or agreements with countries not on the “covered jurisdiction” list.

On balance, businesses and tax administrations may find the new rules very helpful in fixing their own tax bill in the US and many other countries. Distributors may choose between Amount B or a transfer-pricing study for each country.

What about Israel?

Israel is an OECD member but is not a covered jurisdiction for Amount B purposes. So the Israel Tax Authority may or may not accept Amount B calculations from Israeli importers and exporters.

Trapped profits amendment problems: The recent “trapped profits” amendment complicates everything international in Israel. The amendment now imposes up to 50% Israeli tax on Israeli resident individual shareholders in private companies that make active or passive profits, including distribution profits.

If an Israeli individual holds 100% of a foreign company, then 75%-100% of foreign profits may be sucked into the Israeli tax and taxed 50% at the shareholder level, including the OECD’s Amount B.

The amendment also taxes the undistributed profits of Israeli companies, including apparently Amount B.

Even olim (immigrants) in their 10-year tax-benefit period are not spared, apparently.

So the OECD’s Amount B is second-rate for many in Israel. Israel’s tax treaties were generally not designed for this. Will double taxation ensue?

All in all, this is so serious that this author is arranging seminars in Jerusalem, Tel Aviv, and Haifa on February 6, 11, and 17 to explain what’s in the amendment and what to plan.

As always, consult experienced tax advisers in each country at an early stage in specific cases.