The agreement by the finance ministers of the G7, the largest advanced economies as defined by the IMF, to impose a global minimum corporate tax rate of 15% is a dramatic development with far-reaching implications for Israel. The two biggest questions raised from Israel's point of view are whether this will be the end of tax havens and whether Israel will adopt the initiative? When such ideas have been mentioned in the past, the Israel Tax Authority has remained silent and ignored the issue. But with the initiative moving forward worldwide, it will now be difficult to ignore.
Among the companies that currently benefit from low levels of corporate tax through the Law for the Encouragement of Capital Investments, and sometimes even zero rates for some Internet activities that go beneath the Israel Tax Authority's radar, are: Apple, Microsoft, Facebook, salesforce, Intel, Oracle and Israeli companies including ICL (TASE: ICL: NYSE: ICL), Check Point Software Technologies Ltd. (Nasdaq: CHKP), and Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA).
The corporate tax rates paid by these companies under the Law for the Encouragement of Capital Investments ranged between 5% and 12% and sometimes even lower.
In any event in internal discussions held by the Israel Tax Authority International Department, the issue has been considered over recent months. One of the major aspects of the new plan being formulated by OECD countries is that multinational giants will be required to complete an amalgamated 15% tax rate in the country where the parent company is headquartered, including for countries where lower rates were paid.
In other words if a US corporation owns a corporation in Israel, which only pays 10% corporate tax, the US corporation would be required to pay the 5% tax difference in the US for its Israeli subsidiary, thus rendering lower tax rates ineffective.
It is also likely that the tax rate paid by the subsidiary will take into account the tax on dividends paid by the subsidiary to the parent company.
With the need to make up for tax shortfalls abroad by parent companies, the Israel Tax Authority understands that it won't be worthwhile for Israel staying on the outside and adopting the international initiative will be inevitable, in order to prevent the loss of tax in Israel by letting parents companies abroad pay the tax elsewhere.
To some extent Israel might even profit from the move because it is not Israel that is pushing this initiative through and Israel cannot be 'blamed' for any corporate tax hike.
It is also unclear whether the new corporate tax will apply to corporations of all sizes.
International tax expert Adv. Dr. Michael Bricker a partner the Meitar Law Office says that in the past the EU spoke of a new tax regime for corporations with annual revenue of more than €750 million but the Us refused such a move.
It now looks like in a compromise move the new 15% corporate tax will be imposed on all multinational companies with annual revenue of more than $1 billion, although the US wants a $20 billion threshold. Bricker said, "In my opinion, Israel will profit from this and will receive additional tax revenues from the large multinational corporations without needing to act unilaterally and because of the high revenue threshold that will be set, Israeli companies won't be hit."
Adv. Leor Nouman a partner in the Tax Department at the S. Horowitz & Co. law firm agrees that the G-7 initiative is excellent news for Israel, "Generally we are talking about a very good measure for Israel. While Israel keeps a corporate tax rate of 21% and perhaps will cut corporate tax for the first bracket to 19% for example, raising the minimum corporate tax rate to 15% in the world's other countries together with the rise in corporate tax in the US will make Israel more attractive."
"In terms of the different tax structures, this might lead to local entrepreneurs preferring to set up ventures in Israel father than leaving for other countries in the world, and it will also attract international companies that anyway want to be close to Israel high-tech, to set up ventures themselves in Israel and not only their R&D centers in Israel."
Adv. Nouman added, "It can be assumed, at least regarding the statements welcoming the arrangement published by the tech giants like Facebook, Google and Amazon, that if the issue is instituted, then the opposition of the international companies to paying taxes in Israel, which would anyway have to be paid in other countries, will be reduced."
Regarding the benefits and incentives that Israel grants corporations through the Law for the Encouragement of Capital Investments, Adv. Nouman said, "As we are taking about specific benefits regarding mainly revenue from intangible assets, there is a reasonable chance that it will be exempted from minimum tax rates and therefore the large tech companies, which transfer knowhow to Israel will not be so easily harmed."
Published by Globes, Israel business news - en.globes.co.il - on June 6, 2021
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