In today's business world, perhaps more than formerly, multinationals are sensitive to the rates at which they are taxed in the countries in which they do business.
Many countries, including OECD members, understand the new rules of the game, and are adjusting their tax regimes to the international business world in order to attract the the investment that they seek, especially in technology.
These processes are also visible in Israel. In the framework of the Economic Arrangements Law passed in late 2016, a dramatic amendment to the Law for the Encouragement of Capital Investments was passed, giving local technology companies and international companies with holdings in local technology companies a reduced corporate tax rate on their income from intellectual property as part of the system of tax breaks for preferred technological enterprises.
This amendment came about the same time as the adoption of the base erosion and profit shifting (BEPS) rules aimed at creating a uniform framework in the OECD, in cooperation with the G20 forum member countries, for providing tax benefits for income resulting from products based on intangible assets.
With the publication of the BEPS rules, Israel rightly saw an important opportunity to develop knowledge-intensive industry and to promote its status as a key country in technological innovation by persuading major global technology firms to invest in Israel (as well as strengthening and encouraging existing activity in Israel). To this end, Israel set reduced corporate tax rates of 7.5-12% for a preferred technological enterprise and 6% for a special preferred technological enterprise.
Israel comes into line with the OECD
In contrast to other OECD countries, however, Israel has adopted a rather restrictive definition of intellectual property for granting a reduced corporate tax rate under the new tax regime. As a result, there are several R&D-intensive sectors ineligible for the benefits, including pharmacological companies manufacturing generic drugs, because no valid registered patent applies to their active ingredients.
In this case, the industry involved is an important one for Israel, making an indisputable contribution to the Israeli economy. This sector realizes the spirit of the Law for the Encouragement of Capital Investment, and companies in it were eligible for benefits under this law before the amendment was passed. In important OECD countries such as the UK, the Netherlands, and Poland, companies in this field are entitled to reduced corporate tax rates, because those countries apply a broader definition of the types of intellectual property the income from which is eligible for a reduced corporate tax rate.
At the initiative of the Israel Tax Authority, Israel recently fell in line with other OECD members by revising its existing legislation. Minister of Finance Moshe Kahlon signed an order on July 1, 2019 expanding the law, starting from the 2019 tax year, to make pharmaceutical companies in the generic drugs field eligible for a reduced corporate tax rate on their income from the sale of their products.
The order also confers eligibility for a reduced corporate tax rate on the basis of rights similar to those held by pharma companies outside of Israel (under local regulation in other countries).
Beyond this important measure taken by Israel in the context of creating uniform tax rules among OECD members, the order constitutes an important incentive for maintaining and bolstering activity, development, and industrial centers in Israel. This will not only contribute to local industry and encourage economic growth, but also preserve jobs throughout Israel, especially in the outlying areas.
Promulgation of the order is an important step by Israel towards becoming one of the advanced countries in the OECD. It realizes the main goals of the Law for the Encouragement of Capital Investment, and enables Israel to consolidate its global status in technological innovation.
Avishay Bardugo is a tax partner and encouragement of investments practice leader at PwC Israel. Shlomit Dola is a leader of global incentives services at PwC Israel.
Published by Globes, Israel business news - en.globes.co.il - on August 27, 2019
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