The Israel Tax Authority on Monday released a circular explaining how it would tax foreign digital companies – such as Google and Facebook – who do business in Israel.The circular said that companies that are not based in Israel can be subject to tax on revenues if they offer their services to Israelis via the Internet. Previous taxation laws, which were written before Web commerce became so significant, only levied such taxes on companies that had production facilities in Israel.If a company were based in countries with which Israel had a tax treaty, it would only be taxed if it were considered a “permanent establishment” here, defined as the enterprise or its agent having a physical, permanent location for carrying out its business.The authority also said such companies doing significant business in Israel would have to register with the Value- Added Tax division.Because Internet-based companies can rack up significant sales without having a physical sales office, however, the Tax Authority is seeking a new approach.For example, according to S. Horowitz & Co partner Leor Nouman, Facebook and Google may sell millions of shekels worth of ads to Israelis, and Netflix may sell subscriptions, regardless of whether they are thought to have permanent establishments in Israel (research and development centers may not count because they are not sales oriented).Until now, such revenues would not have been taxed. The Finance Ministry thinks it can reap significant revenues from such a policy, which Likud MK Yoav Kisch has been promoting through legislative efforts.But Kisch, who went as far as to float a blimp emblazoned with the words “Google Must Pay Tax” outside Google’s Israel office in Tel Aviv last week, came out against the circular.“The Tax Authority has chosen the wrong track. The method of ‘permanent establishment’ as a test point may cause the closure of local branches of those companies,” he said. His bill, he added, would distinguish between local and global Internet products.Erez Tsur, the chairman of the hi-tech umbrella group IATI (Israeli Advanced Technology Industries), called for a “responsible tax policy” that would not “damage one of the important growth engines in Israel.”Already, he argued, Israel had a tough time competing for hi-tech investment with other countries.“The tax increase in the Tax Authority circular further harms the ability of Israeli hi-tech to compete globally, and adds burden to the multi-national companies in Israel,” Tsur said. “Do we have to kill the hen that lays golden eggs so we can enjoy its meat and feathers?” he asked.Representatives from Google, ebay, PayPal and Facebook all declined to comment.