Israel’s parliament is expected to pass by the end of the year legislation that will slash corporate taxes for multinational companies that invest in the country, in an effort to draw more firms to its shores and ensure that those already operating in Israel maintain their operations.

The legislation, called the “Innovation Box” proposal and backed by the Finance and Economy ministries, will cut corporate income tax to 6 percent for companies with consolidated revenues of over $2.6 billion and to 12 percent for smaller firms. This compares to a current corporate tax rate in the range of 16% to 25%. The withholding tax rate on dividends will be lowered to 4%, compared to a rate of around 20%-25% today.

The move is in response to OECD guidance that deals with Base Erosion and Profit Shifting (BEPS) — strategies for tax avoidance that make use of gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.

The new OECD measures, which have been adopted by 100 countries and jurisdictions, recommend that multinational companies register their intellectual property (IP) in the same location in which their research and development is done. Today companies pay taxes where the intellectual property of their technology is registered, and that is generally in countries with lower tax rates. Israel is trying to use this new global tax reshuffle to its advantage and is looking to wield its new tax regime to tantalize foreign companies to set up R&D centers in Israel and register their IP here.

Drumming up interest

To raise awareness about the new tax structure and to draw the attention of multinational countries — those that already operate in Israel and also those that don’t — Israel held a sort of a roadshow in the US last week, meeting company chiefs and tax experts to explain the new regime.

Economy Ministry director general Amit Lang and Ziva Eger, chief executive of the Foreign Investment and Industrial Cooperation at the ministry, made stops in Boston, Connecticut, New York, New Jersey and Philadelphia and met with company heads from a wide variety of sectors, including pharma, medical devices, advanced manufacturing, aerospace, financial services, and edtech.

Ziva Eger, chief executive of the Foreign Investment and Industrial Cooperation at the Ministry of Economy and Industry (Courtesy)

Ziva Eger, chief executive of the Foreign Investment and Industrial Cooperation at the Ministry of Economy and Industry (Courtesy)

“Many of the companies are in a process of examining their ways to deal with the upcoming changes” recommended by the OECD, said Eger in an email from the US. The reaction of the companies they met with was “very positive” she said, with companies showing a “deep interest in the Innovation Box.”

Companies from Google to Microsoft and Intel have R&D facilities in Israel, but their intellectual property rights are not necessarily registered here.

A report by Israel’s chief scientist in June warned that the new OECD guidelines for the taxation of multinational corporations operating locally may affect their volume of activity in Israel. Currently, there are more than 300 R&D centers belonging to multinational corporations in Israel, which for the most part pay taxes abroad on the products they develop in Israel, the report said.

Avi Hasson, head of Israel Innovation Authority (Courtesy)

Avi Hasson, head of Israel Innovation Authority (Courtesy)

“Today these companies don’t register their IP here. They register it somewhere else,” Avi Hasson, the ministry’s chief scientist and head of the Innovation Authority, said in an interview with The Times of Israel last week. The 6-plus-4 package of tax benefits Israel is proposing “is definitely attractive” and puts Israel on the radar of these companies, he said. Before the new regime “Israel was not on the charts. There was Singapore and Ireland and other countries. Now we are big time on the chart.”

The proposed tax cuts come as multinational companies operating in Israel and local giants like Teva Pharmaceutical Industries Ltd. and Check Point Software Technologies Ltd. have come under public scrutiny and criticism for getting too many tax breaks and not paying enough dues.

In July, TheMarker financial website said the Finance Ministry expects a drop of NIS 200 million ($52 million) a year in revenues from taxes from big multinational companies operating in Israel, after the tax rebate. The ministries, however, expect the decline in revenue to be offset by the added revenues of hundreds of millions of shekels that hope will reach the treasury coffers from new companies setting up activities in Israel.

“We believe there will be additionality here,” said Hasson. “The aim is that in the end the government won’t get less tax, but its tax base will be enlarged. Today multinationals hardly pay taxes in Israel. The idea is for the tax base to grow significantly. You lower the percentage, but the base grows.”

Lowering the tax rate further for these companies is likely to draw renewed fire from the public, said Yaniv Pagot, an economist and head of strategy for Ayalon Group, a Ramat Gan, Israel-based institutional investor. But Israel has not choice but to cut, he said.

“This is a war in which taxes are a tool to draw and keep companies locally,” Pagot said. “We have no choice but to enter the fray and lower our taxes as well, to keep up with global competition. The world doesn’t stand still, and taxes are a global issue, with countries courting the multinationals. If these companies would have to pay high taxes in Israel, they likely wouldn’t stay here. But along with the lower taxes Israel should make sure to offer an attractive package as a whole, and sit with these multinationals and see what more they need to come here. Taxes can’t be the only tool we use to attract companies because that is a war I am afraid we cannot win.”