Israel will need to amend its corporate tax policies to counter the effects of US President Donald Trump’s tax reform, the head of Israel’s Tax Authority head acknowledged — but only slightly.
“There will need to be some adjustments to our taxation,” Moshe Asher said. “But because Israel’s taxation policy was updated just last year, it is very competitive compared to that of other countries, so the adjustments we will need to make will be minor.”
Any adjustments made to Israel’s taxation policies would be implemented this year or in 2019, he added.
Trump’s Tax Cuts and Jobs Act, which passed last month, aims to overhaul the US tax code by cutting the number of personal income brackets and limiting or doing away with a selection of popular tax breaks. It also slashes the corporate tax rate to 21 percent from the previous 35%, effective this year, making it one of the lowest corporate tax rates in the world.
The US tax reform will make it more attractive for Israeli firms to set up businesses or acquire companies in the US market, international tax attorneys have said. The lower US tax rate could also spur an outflow of Israeli startups to US shores, impacting Israeli tax revenues, tax attorneys have warned.
Prime Minister Benjamin Netanyahu last month set up a panel to study the implications of the recently passed US tax reform on Israeli and US firms operating in Israel. He instructed the head of Israel’s National Economic Council, Avi Simhon, to have the team come up with recommendations within 30 days.
“Some of the US reform’s components are not relevant to Israel and we don’t know yet what the guidelines for their implementation will be,” said Asher. “But we are monitoring the situation by consulting Israeli tech firms and tax consultants, who are giving us their interpretations of developments.”
“We will submit our proposals in the coming weeks,” Asher, who is a member of the panel, said. “And I hope that any amendments that we think are necessary will be implemented already this year or in 2019.”
Until now, the US tax rate was higher than Israel’s — an average of 35% compared to the Israeli rate of up to 25%. But with the US rate dropping to 21%, the incentives for setting up a business in the US have grown.
In comparison, Israeli corporate tax rate dropped to 23% in 2018 from 24% in 2017. In addition, the Encouragement of Capital Investments Law offers added tax incentives with the aim of attracting capital to Israel and encouraging investments by foreign and local investors. Companies that benefit from the capital investments law — many of them high-tech companies or companies that export their products — are called preferred enterprises, and they pay a corporate tax rate of 5% to 16%.
Tax attorneys have speculated that whatever changes Israel will propose, they will likely apply to those companies that are entitled to the benefits under the Law for Encouragement of Capital Investments. Israel may cut the maximum corporate tax for these companies from 16% to 12%, for example, they said, and/or soften the terms set out by the law so that a greater number of companies can be eligible for rebates.
Asher added that Israel is also eager to upgrade the tax treaty Israel has with the US regarding double taxation, which was signed between the countries in the 1970s and entered into force in 1995. “The treaty we have is very old,” he said.
“We have asked to adjust it, and make it similar to the OECD model, which is the standard accepted globally today. I hope we will be able to do this. The treaty regulates how much money we need to keep as withholding tax. An upgrade of the treaty will help boost trade for both sides, while reducing tax surpluses that have been collected.
Taxing multinational internet giants
The tax authority is also looking to tax global multinational internet giants operating in Israel, an issue many countries are contending with.
The idea, Asher said, is to tax only companies from countries we have tax treaties with and that have a physical presence in Israel, whether in the form of an office, a management team or a local branch. And even then, the corporate tax rate would be applied only on the profits that are generated from their local activities.
“This process will generate hundreds of millions of shekels a year,” he said. “We are already in dialogue with international companies about this and our tax assessments will be presented to them this year.”
Taxation of internet multinationals is an issue that is vexing many nations. In Europe, for example, clashing interests are hindering efforts to form a unified policy, the AFP news agency reported in November.
France has led a major push to increase taxes in the European Union on mega tech firms such as Google and Facebook, which are accused of booking huge profits at the expense of state coffers. But smaller EU member states that serve as low-tax headquarters for the giants insisted that the EU should only approach the issue on a far broader international level.
The European Commission, the EU’s executive arm, is due to present proposals for taxing tech giants such as Google and Apple this year.
Members of the 35-country OECD, the policy club of industrialized nations, are meanwhile negotiating their own approach to taxing digital companies with hopes of a formal proposal sometime this year, AFP said.
Current tax conventions that are in place today allow countries to tax foreign corporations operating within its borders if they are defined as having a “permanent establishment” locally, Asher explained.
“In the old economy there was no problem — you could see the buildings, the workers, the physical presence on the ground,” Asher said. “It was easy.”
However, in a digital world the reality is different: All of the activity can be done online.
“In that case, we identify the correct combination of physical and digital presence, in order to determine that there is a ‘permanent establishment,'” Asher said. “After determining that, we can tax only the proportion of profits generated from the local activities.”
The Tax Authority set out its tax guidelines for multinational internet companies in April 2016. Implementation of this policy has started only now, though, and the authority is currently holding discussions with the firms. The first tax assessments will be issued shortly, he said.
If there is a dispute, and there may be, he said, “the courts will decide.”
Asher was not concerned the new taxation policies will see the giants take their business elsewhere.
“It will not dissuade foreign companies from operating in Israel,” he said. “We set out our guidelines a year and a half ago, and all of these companies are still here.”
New Bitcoin draft guidelines set out
The tax authority has also recently issued draft guidelines regarding the taxation of income generated through the issue of initial coin offerings – a phenomenon that is taking place in the tech industry in Israel and abroad.
Last year, 10 Israeli high-tech companies, including Sirin Advanced Technologies and Bancor Protocol Foundation, raised $480 million through initial coin offerings, meaning the funds were raised in return for cryptocurrencies they issued. This amount is separate from the $5.24 billion figure raised by Israeli startups in 2017, IVC said in a report earlier this month. 2017 was the first year IVC tracked the funds raised through ICOs.
Tech firms use ICOs to raise money, promising those who buy the tokens future assets or services, Asher said.
“In draft guidelines that we set out earlier this month, which are now out for public comments, we determined that these companies should be taxed on the money raised only once they supply the product or the service,” he said. This is because the tax authority sees the money raised as an obligation the company has to the person from which it has raised the money, he said.
“When you deliver the product or service you now have the legal right to keep the money. Until then, the money they have received will be defined as obligation or advanced income, and that amount will not be taxed,” he said.
“Once the comments are in, the final guidelines will be issued,” he said.