Minister of Finance Avigdor Liberman has announced his first major move. At a meeting of top Ministry of Finance officials this morning, Liberman announced that after consultation with the professionals in the ministry, he had approved in principle Israel's accession to the emerging digital economy taxation plan, in advance of the approval of the plan by a special committee of the OECD on June 30.
The plan calls for a change in the existing system of corporate taxation in such a way as to enable countries to collect more tax from international companies that sell products and services to their citizens. The aim of the plan is to update taxation legislation to deal with the digital economy and the phenomenon of companies that report their profits in countries with low tax rates, irrespective of the countries in which they made their profits. The plan will affect technology companies like Facebook, Apple, Amazon and Google.
"The economy is becoming more and more global," Liberman said, "and we need to introduce policy measures in cooperation with other countries. The Ministry of Finance will act to ensure that the Israeli economy meets international standards in the various areas, including taxation and the environment, such as with a carbon tax. The new policy outlines will enable the State of Israel to obtain revenue from the giant companies on account of their activity in Israel."
According to an International Monetary Fund report published in October last year, a carbon tax is the most effective way of combating global warming and reducing air pollution. The idea of taxing carbon emissions from the burning of fossil fuels has been discussed for many years, but has aroused opposition because of the fear that it will put up electricity bills. Economists argue, however, that the tax revenues can be returned to consumers via tax rebates and dividends, and that in addition, a carbon tax will spur massive use of clean, renewable energy.
The OECD plan for taxation of the digital economy has two parts. The first (Pillar 1) concerns taxation of giant international corporations by the countries to whose citizens these companies provide services or products. Under the emerging plan, it will be possible to tax part of a corporation's profits even if it has no physical presence in the country concerned.
Pillar 2 of the plan seeks to prevent tax planning designed to divert profits to tax havens, and to end the "race to the bottom" in tax rates. The plan calls for a minimum rate of corporate taxation. The G7 group of industrialized nations announced at the beginning of this month that it had agreed a minimum rate of 15%.
Pillar 2 will apply to international groups with total annual turnover of €750 million. Participating countries will not be obliged to raise tax rates applying to companies operating within them to the minimum rate; the parent company, or other companies in the group, will be required to complete the tax paid to the minimum, payable to the tax authority in their county of residence.
At the end of June, the plan is due to be agreed by ministers of the 139 participating countries.
As for a carbon tax, according to the Ministry of Environmental Protection, 92% of the 35 countries in the OECD operate a carbon pricing mechanism, the exceptions being Turkey and Australia and some states in the US. For years, the OECD has recommended to the Israeli government that it should consider pricing carbon through the duty on fuels, which would cover 80% of greenhouse gas emissions.
The Bank of Israel also recently came to the conclusion that a carbon tax was the most effective policy for reducing greenhouse gas emissions. In the background is the fear that the EU will impose duties on imports from countries that do not practice carbon pricing, which could hit Israeli exports to Europe, Israel's largest export market.
In the coalition agreements of the new government, Minister of Environmental Protection Tamar Zandberg (Meretz) succeeded in introducing several promises relating to climate change issues, but the key to implementing such policies lies in the hands of Minister of Finance Avigdor Liberman.
This morning, Liberman showed his intention of abiding by the promises and of placing environmental protection and the fight against global warming on his order of priorities, when he said he would support a carbon tax. He will now have to deal with claims that such a tax will actually harm Israeli exports, and will leave the receipts from it in the hands of the EU.
Published by Globes, Israel business news - en.globes.co.il - on June 22, 2021
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