Proposed tax plan could spook Internet companies

The plan is based on a draft of OECD recommendations for tackling multinational corporations’ aggressive tax planning.

US dollars and euros banknotes are seen in this illustration photo (photo credit: REUTERS)
US dollars and euros banknotes are seen in this illustration photo
(photo credit: REUTERS)
A plan circulated by the Israel Tax Authority to enforce taxes on Internet activities has some analysts worried that the enforcement could send big players in the high-tech field packing.
The plan, which is based on a draft of OECD recommendations for tackling multinational corporations’ aggressive tax planning, would subject Internet-based transactions of foreign-based companies to Income Tax and Value Added Tax (though its application would depend on where the company is based).
In 2014, the OECD took on the problem of Base Erosion and Profit Shifting (BEPS), which “refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.”
The idea was to create a coordinated action plan among countries to ensure that they all filled in the loopholes. Letting countries act alone would simply give companies an incentive to shift to an equally attractive location that hadn’t put more stringent tax laws in place.
Among the issues it sought to work out where where companies were choosing their “permanent establishment” status, evaluating the importance of intangible services like data storage, and figuring out how to tax Internet-based links in multinational supply chains.
“The tax authority's circular which is (supposedly) based on the OECD recommendations, are very preliminary and no country in the world has yet implemented them. I don’t think that Israel should adopt these recommendations early, because there is a risk,” said Guy Reshtik, head of the tax department at Baker Tilly, Israel.
In his view, companies such as eBay, PayPal, Google, Facebook that carry out some business in Israel through the Internet and local employees could find themselves subject to all sorts of new costs.
Google, for example, put its international headquarters in Ireland because of its friendly tax regime, a regime with which Israel often competes when looking to lure high-tech investment. Israel just beat Ireland as the location for Intel’s latest factory, a $6 billion investment. The previous one was built in Ireland.
“The reality is that most governments use tax incentives to attract foreign investment that creates jobs and economic growth and, naturally, companies respond to those incentives,” Google spokesman Paul Solomon said. “If politicians don’t like those laws, they have the power to change them.”
Google, he noted, paid an effective global corporate tax rate of 19.3% last year, mostly in the US where the business originated.
That competition over taxation, however, is precisely what the OECD plan is trying to overcome, in part because it lets enormously successful and profitable companies pay lower taxes than regular businesses.
In 2010, for example, Israel's government paid out NIS 5.6b. in tax credits for capital investments, 70 percent of which went to Teva, CheckPoint, Israel Chemicals and Intel. As a result, they managed to lower their tax rates from 25% to an average of 3%.
Hadass Sharim, who heads Baker Tilly’s SMB division, noted that the tax authority is fully empowered to move ahead with the decisions because they are based on existing law.
“The tax authority has to match its enforcement to the law, and as the situation changes they change their approach,” she said. But the law, she noted, was an old one that may not have foreseen the advent of Internet commerce.
Given the global nature of the problem, she said, Israel might be wise to wait before moving forward.
“As far as I know there is no other nation that is running to implement these,” she said.
The Tax Forum of the Israeli Bar Association has raised similar concerns about the proposal.