A global deal on a minimum corporate tax rate of 15% was reached last week by the OECD and signed by 136 countries worldwide. The agreement goes into effect in 2023 and is aimed at pulling the rug from under the feet of tax havens, ending the race between countries to offer lower tax rates, and exacting a "real tax" rate from multinational companies. Moreover, the agreement means that tech giants like Amazon, Facebook, Google and Mictosoft will be required to pay tax in the countries where they operate, and not only where they are headquartered.
Countries like Ireland, which have charged low corporate taxes, will be hit hard after the agreement comes into effect.
Tadmor, Levy & Co. partner and Tax Department head Adv. Boaz Feinberg said, 'The efforts of OECD countries to set unified rules for international taxation, in other words tax on economic activities taking place in multiple countries has led to an intensification in competition between countries to reduce their tax rates in order to attract multinational companies. Consequently, there has in recent years been a consistent and substantial fall in corporate tax rates in OECD countries. The US succeeded in persuading the G20 countries to compel all multinational corporations to pay to their parent country a minimum corporate tax of 15%. Those who have promoted the measure believe that this step will substantially reduce the weight of tax considerations when multinational companies are choosing the location of their activities."
On the one hand, Israel can take advantage of the measure and begin to collect significant taxes from large companies that have been awarded very low tax rates to date including Intel. This step could help fill the state's empty coffers in the wake of the Covid crisis. On the other hand, the question arises if without the tax incentives, Israel will remain attractive for multinational companies.
S. Horowitz & Co. partner and Tax Department head Adv. Leor Neuman said, 'Overall the historic agreement imposing a minimum tax of 15% is very good for the State of Israel. Huge companies that due to the global changes including BEPS (base erosion profit shifting) have been examining in recent years gradually leaving offices and headquarters where they are located mainly because of low tax incentives (such as Ireland and Luxembourg) may look for different places and Israel would do well to cut its corporate tax to 19%, which would make Israel more attractive."
Neuman added, "Also in terms of the various tax structures, raising the tax rate in the countries of the world will lead to local entrepreneurs preferring to set up ventures in Israel rather than migrating to other countries around the world and it will also attract international companies who are looking to be close to Israeli tech and found ventures themselves in Israel and not just a R&D center in Israel."
According to Adv. Boaz Feinberg, 'The measure can influence the State of Israel not only immediately regarding minimal corporate tax and de fact cancellation of some of the benefits of the Law for the Encouragement of Capital Investment, which incentivizes tech grants, such as for Intel, to set up their plants in Israel. Over time it might also lead to international involvement in tax benefits for immigrants, for example. The State of Israel grants tax benefits for new immigrants and returning residents. An action that allows intervention in fiscal policies of one type might create a momentum which ultimately will harm the ability of the state to plan independent fiscal policies in terms of collecting differential tax rates of the aforementioned type. Time will tell."
Amit, Pollak, Matalon law firm partner and Tax Department head Adv. Rachel Guz-Lavi CPA said it is too soon to know if Israel will have to change the law for the Encouragement for Capital Investments in order to bring it into line with the global minimum corporate tax decision. "In the OECD's draft law, it talks about the application regarding multinational companies with minimum annual revenue of €750 million. It's possible that amendments will be enacted in the Laws for Encouragement with a separate definition for a multinational company, so that these laws will be in line with other countries. I am doubtful that the matter will influence small and medium-sized local companies that benefit from the Encouragement Laws. You have to remember that ultimately the aim of the reform is to cope with the tax base erosion of the activities of international corporations, and not local companies."
Adv. Guz-Lavi added, "Although this is an across the board measure of the global tax regime, it's possible that there won't be such significant operative issues. Tax is ultimately paid on the profit line, which is a result of revenue less permitted expenses. In this range, every country can put in many tax benefits and still meet the nominal tax minimum of 15%. For example, allowing different types of expenses, from lower taxation for dividends etc. So when corporations pay the tax, what is important is the effective tax amount for payment and not actually the nominal tax rate applied by the country."
Adv. Nouman agreed and added, 'Meanwhile we see that while we are talking about specific benefits that relate mainly to revenue from intangible assets according to the BEPs regulations, there is a good chance that it will be possible to have them as exceptions from minimal tax rate liability and so the big tech companies who transfer and will transfer knowhow to Israel won't be harmed so quickly."
Published by Globes, Israel business news - en.globes.co.il - on October 10, 2021
Copyright of Globes Publisher Itonut (1983) Ltd. 2021