Taxman could make ‘Israeli firms’ Google and Facebook pay up

Taxman could make ‘Israeli firms’ Google and Facebook pay up

New rules make it almost certain that firms with a ‘substantial’ digital presence among Israelis will have to pay taxes here. Will that scare away the multinationals?

Entrepreneurs gather at the Google campus in Tel Aviv. (Anna Morein)
Entrepreneurs gather at the Google campus in Tel Aviv. (Anna Morein)

The Israel Tax Authority on Monday issued new regulations that make it far more likely that international tech firms like Google and Facebook will get a bill from the local taxman.

Under the new rules, companies that have “substantial” operations in Israel, or with Israelis, selling them products or providing them with digital services – will be considered “domiciled in Israel,” thus subjecting them to local tax laws.

As a result, according to a group that represents many of the international corporations that operate in Israel, the Israeli tech economy was likely to suffer.

“The Israeli high-tech industry is already facing serious challenges in attracting investments from multinational tech firms, as we are in competition with other countries for those investments,” said Erek Tsur, chairman of Israel Advanced Technology Industries. “The increased taxes announced by the Tax Authority will harm the ability of the industry to increase the activities of foreign companies in Israel, an objective we all share.”

Not necessarily, believes Shlomo Gradman, chairman of the Israeli High Tech CEO Forum. “The multi-national companies that have made a major impact on the Israeli economy are here not to sell products or services, but for our engineering prowess and technological innovations. That is not going to change.”

The new rules, the Tax Authority said in its latest bulletin, reflect the change in “the digital economy that has been taking place in recent years, both in terms of products sold and digital services provided. Many of these products and services are marketed specifically to Israelis by international organizations, with business conducted either directly with them or via local subsidiaries or agents. These local agents conduct marketing campaigns, recruit customers, and provide them with business or technical services that are paid for.”

If an entity does business with Israelis, or its business is done by Israelis and for Israelis, as far as the Tax Authority is concerned those entities should have to pay taxes in Israel.

The bulletin discusses primarily the requirement to pay income tax and VAT (value added tax) sales tax, and would take into account tax treaties and other international agreements Israel has signed. But in principle, the Tax Authority said, “income earned by international corporations in Israel under certain circumstances will be seen as income earned by a domiciled Israeli corporation,” and will be treated as such for tax purposes.

Erez Tsur( Courtesy)
Erez Tsur (Courtesy)

The main target of the bulletin is not the delivery of shoes or clothing from websites like Amazon or Chinabuy; there are already specific rules in place that subject or exempt those sales from import duties and 17% VAT depending on source or value. At issue are “products” such as web advertising services or online support services that are provided by companies like Google and Facebook (and many others) that do business in Israel.

The issue of how and whether to tax digital products sold to consumers – like apps or e-books – is still under discussion, and the Knesset is currently considering rules on whether they should be subject to VAT charges.

The bulletin was issued after years of debate among Israeli economic officials – and a High Court lawsuit – in which groups representing consumers, government, and the high-tech industry wrangled over how much, or even whether, to tax foreign corporations that do digital business with Israelis. The first to bring the matter to the attention of the Israeli courts was Guy Ophir, an attorney who in 2013 filed a petition with the High Court demanding to know why the Tax Authority was not collecting taxes from internet sites that were making money selling goods and services to Israelis, as well as brokering business deals inside the country, albeit from foreign locations.

“It seems,” Ophir wrote in his petition, “that although all taxpayers are equal when it comes to paying the high taxes the country demands, there are those who are ‘more equal’ than others and who do not face penalties, civil or criminal, for failing to report taxes or misleading consumers into thinking that the VAT collected on purchases is sent to the government.” The petition was dismissed in March 2014 after the government said that it would voluntarily draw up rules on taxation criteria.

The key question for the targets of the Tax Authority’s plan is how to define “domiciled in Israel,” and the bulletin answers, “very liberally.” The key tenet relevant for Google and other international firms is that they will be considered Israeli if they have “a substantial digital presence” locally. That could include having a local office, running their sites from Israeli servers, or doing a lot of their business in Hebrew. That tenet could cost a company like Google and Facebook huge amounts of money, since their platforms handle local Hebrew-language advertising.

Other signs of an Israeli company for the Tax Authority include a large local support staff and/or contracting with local firms to provide services, charging for services in shekels or accepting local credit cards as payment, conducting their services or sites in an “Israeli style” (this was not defined), and others. If anyone has any questions, the bulletin said, they are welcome to consult with tax officials on their status.

Neither Google nor Facebook – two companies with extensive operations in Israel – could be reached for comment. In previous discussions, spokespeople for both companies have shied away from discussing the matter, preferring to say that they fulfill their obligations under the law.

Shlomo Gradman speaks at ChipEx2012 (Photo credit: Courtesy)
Shlomo Gradman (Courtesy)

According to the Tsur of the Israel Advanced Technology Industries, the announcement is the last thing Israel’s high-tech economy needs right now. Given the security issues, time differences, extremely arcane regulatory atmosphere, the strong shekel (meaning less dollar profit for companies that sell overseas), and a host of other issues – coupled with the many up-and-coming nations that are willing to overlook taxes and other matters for foreign companies – Israel could face problems attracting investments in the future.

“While taxes are a necessity, they must be implemented with “responsibility,” said Tsur. “We may end up slaughtering the hen that lays the golden egg. I urge the Tax Authority to examine the issues and avoid making moves that will harm the prospects for economic growth in Israel.”

No need to panic, said Gradman. “I don’t see it as a major issue for tech development in Israel. There are good reasons to charge taxes for online activities, and the matter is under discussion in many countries around the world, including the US. And of course, nobody likes taxes, so we can’t call it a positive development.

“Nevertheless, it is far from a ‘death bow’ to the tech economy,” said Gradman. “Multinationals don’t come to Israel to make money on web ads – they come here to take advantage of the innovations in the Start-Up Nation. That is not going to change – Google, Facebook, and other multinationals will continue to flock to Israel for their new technologies.”

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