Tel Aviv can become a world-leading financial center. There is already a high level of globalization in Tel Aviv, but to leverage the city's economic potential, dramatic changes are needed in regulation and taxation.
In various surveys giving economic rankings to cities around the world, such as the Citi Private Bank survey, Tel Aviv appears in last place. In the Global Financial Centres Index (GFCI), which covers 75 cities, Tel Aviv does not appear at all.
Eight cities in Asia are among the 20 top-ranked cities of the GFCI this year, and there is no reason why Tel Aviv should not make the list. Some encouragement can be drawn from the last GFCI report, published in March 2011, in which Tel Aviv is mentioned as a candidate for the next rankings.
Taxation is an important component in the ranking of financial centers. Tel Aviv will therefore be able to compete successfully with other cities only if the government reduces the tax burden substantially. In the age of globalization and competition between countries, the main way of attracting investment is by lowering tax rates on companies and individuals below prevailing rates around the world.
In addition to a reduction in tax rates on businesses, the vision of upgrading Tel Aviv to a financial center depends especially on vital changes in Israel's tax laws, which are not a favorable environment for attracting investment in general, and financial institutions in particular. Foreign investors interested in investing in Israel and doing business here withdraw after a short acquaintance with our complicated and opaque tax laws.
A central problem in this context is the uncertainty of the tax regime, which has a deleterious effect in foreign investors' economic planning. In Israel, there is a "taxation vacuum" when it comes to activity of foreign financial institutions in the country. Just as taxation of venture capital funds was regularized, so the tax consequences of activity by foreign financial institutions in Israel needs to be regularized and clarified. That will help them enter the local capital market, for the good of everyone in Israel.
We can learn from the experience of other countries in this matter. London, for example, which led the financial centers rankings in the past two years, is liable to lose its place in future rankings because of higher taxation of banks.
Another important factor in turning Tel Aviv into an international financial center is human capital. Some of the best brains in the world are to be found in the local capital market, centered on Tel Aviv, but the number of workers can, and must, be multiplied through immigration of Jewish financial experts currently working in other financial centers around the world. The tax benefits for new immigrants and returning residents that the government introduced in 2008 are not encouraging such people to come to Israel.
If substantial changes are made in economic policy, Tel Aviv will rise in the international rankings and become attractive to Jewish bankers, brokers, and so forth. Turning Tel Aviv into a financial center is in the national interest. Creating an advantage in finance, as in high tech, will promote that aim and give a boost to economic growth from which every citizen of Israel will benefit.
Dr. Avi Nov is a lawyer who represents Israeli and foreign clients in tax cases. He manages the IsraelTaxLaw.com tax website.
Published by Globes [online], Israel business news - www.globes-online.com - on May 25, 2011
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