Tax cut plan would see rates slashed for high tech companies

Israel’s Finance Minister Moshe Kahlon is working on a plan to slash taxes for large and mid-size technology companies that operate in Israel, a Finance Ministry official said Thursday, confirming an earlier report on the TheMarker website.

According to the plan, high tech companies that have annual revenues of over 10 billion shekels ($2.6 billion) would pay a corporate tax rate of just 6 percent compared with the 9%-16% rate they pay today, the official said, and they would pay a dividend tax of 4%.

Mid-sized companies that post revenues below 10 billion shekels a year will pay a lower corporate rate of 12%, and a 4% rate on dividends, the official said.

The Finance Ministry plans to present the plan as part of the forthcoming national budget, TheMarker said.

Kahlon said on July 11 that Israel plans to cut billions of shekels in taxes in the coming national budget in an effort to encourage economic growth. In September 2015, Kahlon and Prime Minister Benjamin Netanyahu announced a reduction in sales and corporate taxes, a move criticized at the time by Bank of Israel Governor Karnit Flug.

The Finance Ministry official said that the initiative is part of an effort to convince global and local companies to register their intellectual property in Israel.

Today companies pay taxes where the intellectual property of their technology is registered, and that is generally in countries with lower tax rates. A new OECD directive however, requires multi-national companies to register their intellectual property in the same location in which the research and development is done. Israel’s planned tax rebate is meant to encourage foreign companies who have R&D activity in Israel to keep it locally and not move it abroad, where taxes paid on the intellectual property may be lower, the official said.

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

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.

TheMarker said the Finance Ministry expects a drop of 200 million shekels a year in revenues from taxes from big multinational companies operating in Israel, after the tax rebate. This is expected, however, to be offset by the added revenues of hundreds of millions of shekels that are expected to reach the treasury coffers from new companies setting up activities in Israel.

Kahlon is basing his plan on the work of a team headed by the director general of the ministry, Shai Babad, TheMarker said.

Companies that set up operations in Israel and register their intellectual property in Israel would benefit from the tax rebate, in addition to companies already operating here, TheMarker said. The criteria for the tax benefits would take into account the number of workers employed in Israel and local investments made in R&D. The Finance Ministry team pointed out that corporate and dividend taxes in developed economies in Europe are around 8%-10%, TheMarker said.

“This is part of an effort not to lose companies in light of competition from other countries for these multinational corporations,” Yaniv Pagot, an economist and head of strategy for Ayalon Group, a Ramat Gan, Israel-based institutional investor said by phone. “We still need to see how much impact these tax cuts will have on the companies, however, as many of them get tax benefits already.”

Companies like Intel and Teva Pharmaceutical Industries Ltd., for example, already get significant tax benefits, he said.

“The big question is why rush to cut taxes?” Pagot asked. “Are these companies operating in Israel because of the taxes or because they need our technology? Were they threatening to leave? It may be hard to sell this to the public without showing reasoned considerations backing the tax cut. Where is the public consultation on this matter?”