Israel and the worldwide taxation system - opinion

The “model rules” are the detailed nuts and bolts for implementing the 15% minimum tax rate in 137 countries, Israel included.

Illustrative photo of Israeli money (photo credit: MARC ISRAEL SELLEM)
Illustrative photo of Israeli money
(photo credit: MARC ISRAEL SELLEM)

The OECD published on December 20, 2021, “model rules” for imposing a minimum tax rate of 15% on corporations around the world, as part of its so-called “Pillar 2” tax package. This concerns you if you are a multinational or an investor in multinationals. Most of us are.

The “model rules” are the detailed nuts and bolts for implementing the 15% minimum tax rate in 137 countries. This means there will soon be OECD taxation rules on OECD computer systems on top of regional and national tax systems. Israel is part of this.

Brave new world?

The OECD wants the Pillar 2 proposals to be finalized and implemented in 2023-2024.

The OECD would apparently oversee the operation of these rules via a special OECD platform for national tax authorities to log onto.

Calculating taxes (credit: INGIMAGE)Calculating taxes (credit: INGIMAGE)

The OECD estimates the additional future tax revenues at around USD 150 billion per year.


Who looks set to pay these additional tax revenues? It seems the top 100 or so multinational groups, including many of the well-known tech giants. But perhaps not all of them, there are some exceptions (“carve-outs”) in the rules.

It remains to be seen whether the OECD or individual countries would extend the rules to smaller multinationals.

Pillar 1

The OECD also has a Pillar 1 package, which proposes to re-allocate profits from where the profits are generated (e.g. offshore servers) to the onshore countries where customers reside. Part of the Pillar 1 proposals are being re-written at the insistence of less developed countries who want a bigger slice of the new tax revenues. So Pillar 2 may precede Pillar 1.

Pillar 2 

– More on the Model Rules

Pillar 2 calls for a minimum corporate income tax rate of 15% on GloBE (Global anti-Base Erosion) income, as defined in detail.

The rules cover multinational enterprise (MNE) groups with annual revenues of €750 million or more in two out of the four preceding fiscal years.

Excluded entities include: governmental bodies, non-profits, pension funds, a regulated investment fund that is a UPE, a real estate investment vehicle that is a UPE (has predominantly real estate and is subject to single level tax.

The Pillar 2 model rules are written in dense jargon with little explanation, but the OECD promises a commentary and more documentation later in 2022. Following is a preliminary brief overview as of now.

The Ultimate Parent Entity (UPE) will pay a Top-Up Tax to under an income inclusion rule to reach the minimum 15% tax rate.

Failing that an intermediate parent entity will pay the Top-Up Tax.

And failing that, constituent entities of the group will be denied expense deductions under an Under-Taxed Payment Rule (UTPR) up to the amount of the top-up tax. Each country will be allocated a share pro rata to employees (50%) and tangible fixed assets (50%).

MNE groups will file a standardized OECD information return in each country that has introduced the GloBE rules.

Many other detailed aspects are addressed. 


Israel is an OECD member and the government has invited public comments on Pillar 1 & 2. They may affect, among others, foreign groups with a privileged enterprise in Israel’s Development Area A. These currently pay 7.5% company tax on profits and 20% on dividends. If they don’t distribute dividends, they may find themselves paying another 7.5% top-up tax in the country of residence of the ultimate parent entity. Many other issues may also arise e.g. questions about preserving the confidentiality of the affairs of Israeli taxpayers from tax officials in another 136 countries (not to mention hackers). Keeping it all in Hebrew may not be possible on the OECD system.


Imagine going to a Residents’ Association of an apartment building with 137 noisy participants. Will it be orderly? Will a lone country like Israel have any real say? The administration chapter of the model rules contains insufficient details.

What will happen to the stock market price of MNEs facing a higher global tax bill? How will disputes be resolved?

The 15% tax is really an alternative minimum tax. But if a negative tax result emerges, the OECD slipped in a second alternative minimum tax (para. 4.1.5).!

Israeli and other corporate groups with revenues below €750m. are not off the hook. They still have to cope with the new OECD multilateral instrument (a complex super tax treaty) and indirect taxes (VAT or sales tax) especially on B2C (business to commerce) sales in many countries.  They will need to review the rules and optimize their business model accordingly…..

As always, consult experienced tax advisers in each country at an early stage in specific cases.

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The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd