After the second world war, Japanese industry had to start from scratch and learn all the new tricks going - efficient manufacturing techniques, all out export effort, cheap yen and even tax planning. We can learn from them. The idea is that tax is a cost that must be controlled like any other cost, within reason. This article briefly reviews tax planning for exporters. In all cases it is vital to consult professional tax and legal advisors in each relevant country. You should also check out tax laws in each country, double tax treaties, free trade agreements and so forth. Export markets may be anywhere in the world from North America to the EU to Asia. If there is political risk or a foreign customer wants financing to clinch the deal, export credit guarantees are available from various governmental and private bodies. Exporting usually follows an evolutionary process. For a novice exporter, it may be sufficient to make a sale from Israel and to ship his widgets to a distributor abroad. The distributor may know his own local market conditions best. In this case, if the Israeli exporter does business with the foreign country from Israel and not in that country, the exporter may avoid having a taxable presence in that foreign country and only have to pay tax in Israel. A double benefit is sometimes possible - no tax abroad nor in Israel. This can apply to exporters with Israeli tax losses, for example, due to high tech research and development costs. This also applies to Israeli exporters that enjoy tax breaks as an Approved Enterprise or Privilege Enterprise, according to the Law For the Encouragement of Capital Investments, 1959. But it is not always clear when an exporter is doing business in a foreign country and becomes taxable there. Some countries are quick to impose tax. For example, India may want full tax if a project relates partly to India and the exporter makes even brief visits to India. The US Internal Revenue Service (IRS) normally taxes foreign exporters who conduct a trade or business that is effectively connected to the United States at federal rates of up to 35 percent plus state and local taxes. All this is a bit vague. To give greater certainty, Israel's tax treaties with the United States and 37 other countries generally only allow the treaty country to tax an Israeli exporters that maintain a "permanent establishment" in that country. A PE is defined in detail in each tax treaty - generally it means a "fixed place of business" (a branch) or a "dependent agent" (agent with few other customers and/or concludes sales on behalf of the exporter). This can still be vague. For example, suppose you are an exporter of widgets to US customers using the Internet - is that a taxable permanent establishment in the US? That is a tough issue not covered by most tax treaties or laws. The Organization Of Economic Cooperation and Development (OECD) has issued draft guidance regarding e-commerce. It seems a "smart" server in a foreign country may be considered to be a permanent establishment, according to the OECD, if it handles all aspects of the sale, such as finding products, checking the customer's creditworthiness, accepting payment, arranging shipment and issuing an invoice (this sounds like a well known online book supplier). But there is one big exception - if the Internet server does NOT belong to the exporter and the exporter makes use of an independent local ISP (Internet Service Provider) who does not act as agent of the exporter. In this case, the exporter may avoid having a taxable permanent establishment in the country where the ISP is located. Note that US state and local taxes are all outside the scope of the US-Israel tax treaty - each American state has its own tax rules. So far we have discussed sitting back and doing export deals from Israel. In later articles, we will address the myriad of additional issues that make exporting a challenge - foreign branch or subsidiary, state and local taxes, transfer pricing and more. firstname.lastname@example.org The writer is an International Tax Partner at Ernst & Young Israel.