The committee considering changes in the Law for the Encouragement of Capital Investments, headed by former Ministry of Finance director general Yael Andorn, is recommending extension of the tax break granted under the law to companies that transfer their intellectual property (IP) registered in another country to Israel. The committee's recommendations will be submitted to Minister of Finance Moshe Kahlon in the coming days.
According to the committee's recommendations, the tax benefits will be contingent on a number of conditions, one of which is that the imported IP must be linked to domestic manufacturing. The state is also offering a reduced 5% tax on dividends and 10 years of stability in the taxation regime for major international companies agreeing to register their IP in Israel and to undertake to employ a minimum number of highly qualified workers in Israel. Extension of the tax benefits is due to the recognition that the existing law prevents entrepreneurs who have acquired overseas companies from moving them to Israel or merging them into the Israeli parent company.
Under the 2011 amendment to the Law for the Encouragement of Capital Investment, leading exporters are entitled to substantial tax benefits of 9% if they operate in central Israel and 16% if they operate in outlying areas. Under the current law, companies are also entitled to reduced tax on revenue attributable to their IP, provided that it was developed and registered in Israel. On the other hand, companies that acquire IP that was not developed and registered in Israel are subject to regular 26.5% corporate tax on royalties or revenue resulting from the asset.
In recent years, many Israeli entrepreneurs, including Check Point Software Technologies Ltd. (Nasdaq: CHKP) founder Gil Shwed, have complained that the fact that they are not entitled to tax benefits is preventing them from transferring to Israel IP business of overseas companies that they have acquired. The arguments of these entrepreneurs have found a sympathetic hearing in the Andorn Committee, which stated, "This fact is having a negative impact on the competitiveness of the tax environment and the incentive for locating ownership of IP in Israel."
The Israeli initiative also follows the base erosion and profit shifting (BEPS) process being promoted by the Organization for Economic Cooperation and Development (OECD) in an attempt to combat tax planning by global corporations. In recent years, a number of countries, such as Singapore, Ireland, and Switzerland, have developed special tax shelters for IP. These shelters, called patent boxes, provide reduced or negligible tax rates for companies registering their IP in these countries. The BEPS process is designed to establish rules for what is permissible and forbidden in taxation, in order to halt uncontrolled competition between countries.
In order to adapt its recommendations to the BEPS principles, the Andorn Committee recommendations have set conditions restricting tax benefits, including a requirement that the IP transferred to Israel must be related to the company's existing or future manufacturing business in Israel. The benefits are also contingent on an increase in production volume and revenue originating in Israel.
In effect, the Andorn Committee recommendations have endorsed the results of work by the Ministry of Finance budget department over the past two years. This work examined ways of encouraging companies to operate in Israel, among other things by means of tax incentives. The Ministry of Finance used the services of global accounting firm Ernst & Young and former Ministry of Finance director general Yarom Ariav.
A source involved in the team's work told "Globes," "Registering IP in a specific country is far more significant than money. IP registration creates roots and an anchor in the country of registration, and makes the company's business activity in that country far more difficult to shift. That's a very important consideration for an Israeli economy that is looking for ways to increase its number of high-tech employees."
The same source also commented on Waze, acquired two years ago by global corporation Google for $1 billion. "It is known that Google moved Waze's IP to another country, where the tax rates are lower," the source said. Besides Google, many major multinationals have development centers in Israel, including Apple Computers, Microsoft, Johnson & Johnson, and IBM. "Israel today sees almost none of the revenue from these development centers," the source explains. "The activity of these development centers is classified as the sale of R&D services to their parent companies, i.e. at cost plus. That's almost nothing compared with the enormous profit their developments are creating for the parent company. If, for example, we're talking about a development center that has invented something that earns the company $2 billion a year, even a 5% tax rate means $100 million more in the state treasury."
Published by Globes [online], Israel business news - www.globes-online.com - on June 22, 2015
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