The tax reform that is being pushed forward by US President Donald Trump will make it more attractive for Israeli firms to set up businesses or acquire companies in the US market, international tax attorneys said.
Trump’s Tax Cuts and Jobs Act, details of which were released earlier this month, aims to overhaul the tax code by cutting the number of personal income brackets and limiting or doing away with a selection of popular tax breaks. It caps the mortgage-interest deduction on new home sales and allows for capital expenditures to be deducted in year one.
The bill, which was touted by Trump as a “big and beautiful Christmas present in the form of a tremendous tax cut, it will be the biggest cut in the history of our country,” also proposes slashing the corporate tax rate to 20 percent from the current 35%. The proposed rate is expected to be effective in 2018, if the bill is passed.
“The part of tax reform that would most impact Israeli companies is the reduction in the U.S. corporate tax rate from 35 percent to an expected 20%,” wrote Douglas Stransky, international tax partner at attorneys ZAG-S&W in an email interview. The law firm focuses on corporate and commercial law, with offices in the US, Israel, China and Europe.
“Under current law, the difference between the Israeli corporate tax rate of 24%, assuming there are no tax incentives, and the U.S. corporate tax rate of 35% prevented Israeli companies from investing in the U.S. market,” wrote Stransky.
Once the US tax reform kicks in, the corporate tax rate of the two countries will be similar, with Israel dropping its rate to 23% in 2018. When that happens, “the U.S. will offer even more opportunity for Israeli companies who want to invest in the U.S. market but had been prevented from doing so because of the oppressive tax rate in the U.S.”
The passing of the reform will make the US more competitive compared to other nations, said Stransky, and the business environment will be more attractive to businesses who want to set up a venture in the US, including Israeli companies that may be looking to acquire a business.
“In the past, when Israeli companies considered acquisitions in the US, the high corporate tax rate was a major hurdle to overcome, in determining whether the acquisition made sense from a business and financial perspective,” Stransky said. “Now that the high corporate tax rate will be reduced, I would expect to see M&A activity increase, as one more impediment to investing in the U.S. will be removed.”
After decades of having a tax code that is outdated, overly complex, and too onerous, the US is on the threshold of pro-growth tax reform, said Stransky.
The reform will encourage US firms to re-patriate money to the US instead of parking earnings in offshore structures to minimize tax rates, said Lip-Bu Tan, president and CEO of Cadence Design Systems, Inc., a US public company that develops software tools that allow semiconductor companies to make their chips, in an interview last week in Tel Aviv. The proposals will “create more jobs and create more innovation and manufacturing. It is good overall…it will stimulate the economy,” he said.
The lower US tax rate could also spur an outflow of Israeli startups to US shores impacting Israeli tax revenues, tax attorneys warned earlier this year.
The reform is also likely to have an impact on pension structures of employees working in the US and employed by local firms, said Amy Sheridan, a tax partner with Zag-S&W. It is thus important to make sure that the salary package is properly structured so as not to incur double taxation on retirement, when employees return to their home country, Sheridan said.
Stransky and Sheridan visited Israel earlier this month to take part in a ZAG-S&W conference on cross-border tax and business issues, including the US tax reform.