The question of how the high-tech sector should be taxed aroused a great deal of interest at the Jerusalem conference of the Institute of Certified Public Accountants in Israel. Whether by accident or by design, a united front formed at the conference of CPAs dealing with the high-tech sector, as against the position of the Income Tax Commission, likewise expressed.
The Commission has long been aware of the problems involved in taxing high-tech, especially in relation to transactions in which foreign companies acquire Israeli companies in share swap transactions. The solution that was found, at the beginning of last year, was to defer the tax event, in such a way that no immediate charge would be incurred on the basis of the share value on the date of the swap.
The Income Tax Commission under deputy commissioner for professional affairs Gadi Agron, initiated a further improvement, in the shape of concessions on capital raising rounds following the merger of R&D intensive companies. The amendment was designed to enable such companies to issue to outside elements (through merger) up to 75% of their shares, and receive the tax concessions due to mergers.
Not all accountants, though, are happy with the situation. Doron Kochavi, a partner in Kost-Forer-Gabbai, argued at the Institute's conference that these amendments do not provide a response to transaction in which the company's activity is sold in consideration of shares of the acquiring company. They do not address the need to enable a share swap free of any tax event also when the Israeli company is acquired by a private foreign company. Kochavi said the tax laws are unsuited to the rapidly evolving reality of the technology sector, because they require overly long intervals before the concessions are allowed.
Before that, the conference heard from Avi Berger, managing partner at Kesselman & Kesselman CPAs, who attacked high-tech taxation which, he says, is the cause of the flight of high-tech companies from Israel. Berger said the Israeli merger law is complex and riddled with restrictions, as compared with the easier US law. And for that reason, Israeli companies prefer to register in the United States, the more easily to effect mergers. Moreover, the high taxation on individuals likewise accelerates the brain-drain of entrepreneurs, while the Law for the Encouragement of Capital Investments is outdated, and does not provide benefits that will tempt entrepreneurs to leave the parent company in Israel.
Agron commented on these points at the meeting held last week by Reuveni-Hartuv-Tefer. Without having heard Berger's remarks, but probably out of familiarity with the prevailing opinion in the sector, Agron said that it was not the tax laws that were driving high-tech entrepreneurs away, but business considerations of foreign investors in Israeli companies.
Published by Israel's Business Arena December 22, 1999