Money cash Shekels currency 521.
(photo credit: Reuters)
Earlier this month, Teva Pharmaceutical Industries Ltd., the generic-drug
manufacturer, announced plans to lay off around 5,000 employees worldwide,
including some in Israel. This triggered a storm of protest not only from the
employees themselves but also from politicians, the Histadrut and
They figured a company that has enjoyed substantial Israeli tax
breaks over the years has to think twice before creating unemployment. Even
State Comptroller Yosef Shapira reportedly concurred with this and said the
layoffs were inappropriate.
Later it was announced that Teva had blinked,
and it will now consult the Histadrut before deciding on Israeli
Shapira went on to publish his annual report for 2013. In it is
a highly critical section on how the government decides its fiscal
According to the State Comptroller’s Report, the process of
taking decisions in the Treasury about taxes is defective, isn’t based on
orderly staff work that includes the presentation of alternatives, and it isn’t
Also, it isn’t reasonable that some parts of the
population groan under the tax burden and the cost of living, while large
companies enjoy sweeping tax breaks.
Now, we know in general terms what
the problem is in Israel, but how can things be improved? On October 10, the
OECD published a new report on fiscal incentives entitled “Supporting Investment
in Knowledge Capital, Growth and Innovation.” Israel joined the OECD in
According to the OECD, most of its member governments use tax
incentives to encourage businesses to invest in research and development
(R&D) to boost innovation and drive economic growth. Others, such as China,
India and South Africa, are doing the same. But reforming these incentives would
give countries a better return on their investment and support young innovative
firms that play a crucial role in job creation.
It seems Israel should
also take note.
In fact, the report says over a third of all public
support for business R&D in the OECD is via tax incentives. Multinational
enterprises (MNEs) benefit the most, as they can use taxplanning strategies to
maximize their support for innovation.
This can create an unlevel playing
field that disadvantages purely domestic and young firms, the OECD
“Much more needs to be done to help young firms play a greater role
in driving innovation and creating jobs,” said Andrew Wyckoff, the OECD’s
director of science, technology and industry. “They are the future of the
knowledge economy and need the same chance to succeed as the major
Improving their access to finance and making the tax rules fair
for everyone is key.”
The tax rules that enable MNEs to shift offshore
profits from intellectual assets, such as patents, are already being reviewed as
part of the OECD’s Action Plan on Base Erosion and Profit Shifting. The OECD
also recommends that governments review their R&D tax-incentive schemes.
This is to reduce the risk of forgoing significant tax revenues in their drive
to boost investment without a commensurate rise in innovation in their
Important aspects of tax schemes that should be reviewed,
according to the OECD, include the scope of eligible R&D, the firms that
qualify and the treatment of large R&D performers.
This is important
because in many countries the current schemes may be more costly than intended.
Tax relief has become more generous in recent years, and the full cost is not
always transparent because these incentives are considered “off budget” as a tax
Helping start-up firms is crucial: Evidence from 15 OECD
countries suggests that these firms generated nearly half of all new jobs over
the past decade, despite accounting for only about 20 percent of total
business-sector jobs, excluding finance. These firms – five years of age or less
– often do not generate enough profit to make use of tax incentives. Better
policies to help them would be cash refunds, carry forwards or the use of
payroll withholding-tax credits for R&D-related wages.
also suggests that well-designed direct support, such as grants and contracts,
may be more effective in stimulating R&D than previously thought, especially
Intellectual property rules also need updating, especially
to avoid an erosion of patent quality. Greater mutual recognition and
comparability of rules internationally would help.
To sum up, Israel can
learn a thing or two from the OECD.
In particular, tax breaks should be
spread more evenly between large companies and start-ups. Government grants and
contracts should be added to the incentive pot. And the Treasury’s
decision-making process should be improved.
As always, consult
experienced tax advisers in each country at an early stage in specific
firstname.lastname@example.org Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.