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Israel vs Kontera and Finisar, April 2018, Supreme Court, Case No. 943/16

In these two cases from Israel the Supreme Court rules on the issue of whether or not companies using the cost plus method must include stock-based compensation in the cost base.

The Court concludes that stock-based compensation is an integral part of the compensation package of the Israeli subsidiaries’ employees with the objective of improving the quality of services rendered and strengthening the bond between the companies’ and employees’ cohesive goals. Therefore, such compensation should be included in the cost base.

The Court also addressed the burden of proof in relation to transfer pricing disputes in Israel. Section 85 A (c) (2) provides that the burden of proof is with the tax authority if the taxpayer have submitted all required documentation, including a transfer pricing study, that “adequately substantiate” intercompany prices to be in accordance with arm’s length principle.

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