Netanyahu hints at Israeli corporate tax cut after US slashes rate

Country ‘should not lag in benefits’ it gives the business sector, PM tells cabinet

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

Prime Minister Benjamin Netanyahu leads the weekly government meeting in Jerusalem, on December 3, 2017 (Marc Israel Sellem/POOL; Flash 90)
Prime Minister Benjamin Netanyahu leads the weekly government meeting in Jerusalem, on December 3, 2017 (Marc Israel Sellem/POOL; Flash 90)

Prime Minister Benjamin Netanyahu signaled that Israel may initiate tax cuts for the business sector, after the US Senate Republicans narrowly passed landmark tax reform early Saturday that will dramatically lower the corporate tax rate from 35 percent to 20 percent.

“The US made a decision last night to reduce taxes,” Netanyahu told the weekly cabinet meeting on Sunday. “Israel should not lag in benefits it gives our business sector, both in taxes and through the easing of regulation and bureaucracy.”

After a marathon session that stretched overnight, the US Senate voted 51 to 49 in favor of the nation’s largest tax overhaul in 31 years.The Senate version and one passed recently by the House of Representatives must now be reconciled into a single bill, and approved again by both chambers, before it can be signed into law.

Illustrative photo of the United States House of Representatives (screen capture: YouTube)

Both versions dramatically lower the corporate tax rate from 35% to 20%, and include more modest tax cuts for individuals across all income levels. The proposed rate is expected to take effect in 2018, if the bill is passed.

The lower US tax rate could spur an outflow of Israeli startups to US shores impacting Israeli tax revenues, tax attorneys warned earlier this year. The US tax reform will make it more attractive for Israeli firms to set up their businesses or acquire companies in the US, Douglas Stransky, international tax partner at attorneys ZAG-S&W, told The Times of Israel last month.

“The tax cut in the US is very attractive and it could be that some Israeli businesses will want to move their activities there,” said Binyamin Tovi, international tax partner at Shekel & Co., a law firm in Tel Aviv on Sunday in a phone interview. Even so, he said, the tax regime for technology companies in Israel is already very attractive, so he does not foresee an exit of tech companies from the so-called startup nation.

Under the current US law, the difference between the Israeli corporate tax rate of 24%, assuming there are no tax incentives, and the US corporate tax rate of 35% prevented Israeli companies from investing in the US, ZAG-S&W Stransky said. But if and when the US rate is cut to 20%, then the rate between the two countries will be similar. Israel’s corporate tax rate will drop to 23% in 2018.

Israel is also expected to put into place by January 1, 2018, a new tax plan that would 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% for companies with consolidated revenues of over $2.6 billion and to 7%-12% percent for smaller firms, depending on their geographical location. 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.

Sharon Shulman, the tax managing partner of EY Israel, speculated earlier this year that if the US rate is cut, these incentives may not be enough and there could be pressure to lower the rate to below 12%. EY Israel is a member firm of Ernst & Young Global Ltd., which is a provider of tax, transactions and advisory services.

Shraga Brosh, the president of the Manufacturers Association of Israel, called on Sunday for Israel to lower its corporate tax to 20%.

“Today, corporate tax in Israel is 24%, and in 2018 it is expected to fall to 23%. This is a corporate tax which is still much higher than in other countries,” he said.

Developed and growing economies worldwide already have a corporate tax of 20%, including Britain, Turkey, Russia, Estonia and Croatia, he added. In Singapore the corporate tax rate is 17% and in Ireland and Croatia it 12.5% . The rate in Bulgaria is just 10%, he said.

The cabinet on Sunday was also set to approve a comprehensive business registration law that aims to ease the regulatory and bureaucratic burden for small and medium-sized businesses when they are being set up.

“The root of economic development is in small businesses. The small businesses go through bureaucratic hell,” Netanyahu said at the meeting, adding that his government is fighting to “hack through the jungle” of bureaucracy.

“There are welcome results,” he said. “Over the past two years we have seen Israel has risen on the international competitiveness index from 27th place to 16th place.” He said the new registration law is a “very important move” that could help Israel gain a ranking within the top 10 of the index, he said. “This is not easy. But we can do it,” he said.

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