The Economic Arrangements Law that passed on Wednesday night introduced an array of tax reforms with the stated goal of advancing the Israeli hi-tech sector, and encouraging foreign and multinational companies to register their profits in Israel.
“This is the most hi-tech friendly budget that any Israeli government has ever passed,” the Prime Minister’s Office director-general Eli Groner told The Jerusalem Post in an interview. “These reforms are a growth engine for Israel, and the prime minister is very focused on growth.”
The general corporate tax will be lowered in two stages – from 25% to 24% in 2017 and to 23% in 2018 – which will make it a competitive tax even from a global point of view. Specifically for hi-tech companies that register their intellectual property in Israel, corporate tax will be lowered from 16% to 12% for those with an annual revenue of less than NIS 10 billion, and from 12% to 6% for companies that make more than NIS 10b. annually.
Dividend tax for international hi-tech companies operating in Israel was cut dramatically from 20% to only 4%. The new arrangements law guarantees that international companies will enjoy the same stable and unchanged tax regulations for the next 10 years.
“On the road to formulating these reforms, we had meetings in my office with all the various relevant people in the field. Not just Finance Ministry and Economy Ministry officials but also people from the industry with a really good understanding of the international hi-tech climate,” Groner told the Post.
The hi-tech specific reforms were spearheaded by the Prime Minister’s Office as a response to new tax conventions adopted by the OECD, of which Israel is a member.
The OECD sought to battle the phenomena of base erosion and profit shifting, or BEPS, used by many multinational companies. BEPS are essentially tax evasion strategies wherein multinational corporations that originate in one country or operate mostly in one country transfer their profits, by registration or other means, to countries that have little to no corporate tax, known as tax havens.
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More than a hundred countries and tax jurisdictions have agreed to implement the new OECD tax convention to combat these practices by various means – such as making it illegal for a company to register intellectual property in a country different from the one where the research and development facilities that developed the product are registered.
“One of the critical economic reforms in this budget is the resolution we passed on BEPS. When I sat down with the prime minister and explained it to him, he grasped it in five seconds and said that we have to figure out a way to ensure that we can attract all these international companies to register their IP in Israel,” Groner added.
According to Groner, the OECD framework is a fantastic opportunity and a severe risk to Israel at the same time. It is an opportunity to get multinational companies operating in Israel to also register their intellectual property in Israel or to attract foreign companies to Israel. However, the risk lies in that if these companies are not incentivized to do so, they might be forced to uproot their activities from Israel and transfer their facilities and employees to a different country in order to avoid sanctions.
“Our competition is Singapore or Ireland. Now that companies are forced to register their IP where their R&D is, the big question is whether they will register their IP in Singapore or Israel, so for us the critical thing was to make sure that we have tax rates that encourage them not to move their R&D from Israel and register their IP here,” Groner explained.
What the prime minister wishes to avoid is cases like the high-profile Waze exit.
When Waze was bought by Google in 2013 for a sum of $1.3b., it was a moment of Israeli pride and a clear-cut example of the success of the Start-up Nation. However, the first thing Google did was transfer the intellectual property registration from Israel to a tax haven. While the Waze product keeps making money, the country of origin for that product is not a beneficiary of the earnings anymore.
“Companies would get a lot from registering their IP in Israel,” Groner said. “It would be more convenient for them since a lot of their actual R&D is done here, in that Israel has a competitive edge. And the added value of being inside the Israeli innovation ecosystem, where everything is at arm’s length, is also a bonus for multinational companies.”
Karin Mayer Rubinstein, the CEO of Israel’s umbrella organization for the local hi-tech and life science industries, lauded the reforms on Wednesday during a conference of her organization’s Multinational Companies Forum. The conference hosted the heads of the forum’s R&D centers in Israel – from Microsoft to Mercedes – who joined Rubinstein’s approval of the tax breaks.
Some, however, believe that in order to truly encourage multinational companies to register and grow in Israel, tax breaks are not enough.
Joey Shabot, operating shareholder in the Tel Aviv office of international law firm LLP, told the Post, “It would be a much more efficient use of the government’s time and resources if they found ways to shorten bureaucratic procedures for multinational companies.
“The procedures of registering shareholding in Israel, ownership, registering a company with the Registrar. In Delaware, it takes an hour to open a company. In Israel, it can take months if you are a foreign company. The process of obtaining tax rulings and pre-rulings in Israel is also very slow and uninviting, while in most Western countries such processes aren’t even required,” Shabot said.
LLP is the only international law firm with offices in Israel and it represents many foreign and multinational companies, in the hi-tech sector and beyond, that do business in Israel.
“If the government wants to attract multinational companies to invest in Israel – and when they invest, to keep their assets here and not take them out – it needs to focus on those bureaucratic procedures,” he added.
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