US tax reform weighs on Israeli high tech

Intel

The US tax reform challenges the attractiveness of Israeli high tech to foreign companies and investors, insists Intel Israel CEO Yaniv Garti.

2018 got off to a good start, with all the economic indicators showing that the Israeli economy is in a good state. The Israel high-tech sector is also prosperous. The number of startups is increasing, the number multinationals in Israel increased by 10% in 2017, and acquisitions of Israeli companies reached an all-time record of $23 billion, most of which came from Intel's acquisition of Mobileye for $15.3 billion. 2017 was also an amazing year for us at Intel Israel. In addition to the Mobileye acquisition, products and technologies on the cutting edge of global technology were developed here. In the manufacturing sphere, we continued the preparation of the production fab for the world's most advanced technology.

In addition, especially because the situation appears better than ever, we must consider well the risks facing us, and there is indeed a threat to the state of the economy - the Israeli economy's competitive capability, including the high-tech sector. Governmental agencies and industrial concerns must take note of this threat and take preventative action against it.

For many years, the sector's competitive capability rested on three elements: human capital; a financial system of investments by foreign companies and foreign money, which financed technological advance and activity by companies; and a governmental system that provided support in the form of incentives for industry. The sector was not only a source of Israeli pride, but also one of the economy's main growth engines. Are changes possible in our situation in each of the elements on which the high-tech sector's competitiveness rests that will lead us into a perfect storm?

As a society, we can be proud that many young people are being added to the high-tech industry, and are world leaders in many fields. There is a shortage of thousands of engineers, however, and competition for high tech's main resource - its employees - is increasing salary costs. In the past, there was a competitive gap between Israel and the developing countries, but we are now seeing a level of excellence there that is no inferior to that of the developed countries, while salary costs in Israeli high tech are on the same level as in the US, and higher than in other advanced western countries.

The recently published Ministry of Economy and Industry Israel Innovation Center's annual report shows that only 8% of Israeli wage earners work in high tech. The weight of many population groups in high tech is significantly lower than their proportion in the population. Only a few hundreds or thousands from the haredi (ultra-Orthodox) sector are employed in it, only 1.6% of the Arabs and other minorities are employed in it, and women account for only 26% of the employees in the sector.

In order to maintain Israeli high tech's leading position, trained personnel and development of human capital is needed, from schools to universities, with more intense studies in mathematics and increased training in the relevant areas. This is an essential interaction: high tech needs a substantial amount of high-quality personnel. Technological education and striving for excellence will strengthen the high-tech industry, and strong high tech means a strong economy, which in turn helps Israeli society.

Continued foreign investments in high tech depend above all on the attractiveness of investment. The new tax reform in the US is likely to detract from the attractiveness of many economies around the world, in particular that of the Israeli economy, for investments from the US, especially in high-tech, manufacturing, and R&D.

The US tax reform cut the corporate tax rate from 35% to 21%, and instituted a number of concessions and carrots aimed at encouraging the creation of jobs in the US and local US production. The reform is especially likely to cause companies to move their center of activity to the US, where most of their target market is located. If this occurs, the reform will affect Israeli development centers, which employ the best engineers, who mostly belong to the top three income deciles and account for 80% of Israel's tax revenues.

Beyond the effect on development centers, the tax reform is liable to have another effect on Israeli manufacturing. The reform is designed to provide an incentive for moving production jobs back to the US and the growth of support businesses. Moving production lines to the US from various countries around the world is very important, due to the fact that both engineers and engineering technicians are employed in this sphere.

This is a momentous step, and relevant government agencies are therefore currently considering and analyzing the consequences for the Israeli economy, as many countries around the world are doing, especially in Europe, and that should be welcomed.

In order to restore the viability of investment in Israel, a range of effective solutions that is broader than in the past is needed, including reconsideration of the corporate tax rate, the withholding tax mechanism for corporate profits, and sophisticated grants mechanisms. Many countries around the world, especially in the European bloc, currently enjoy a competitive advantage because such mechanisms have been implemented there for years. The assessment of the competitiveness of the solutions must include a large number of countries.

Reconsideration of the Israeli tax structure and the set of solutions have costs, and this should be recognized. It should also be kept in mind, however, that if Israel does not take measures to adjust itself to the new situation, this will have substantial effects on the Israeli economy. An absence of investments in Israel by international companies and reduced viability of investment in Israeli companies will detract from exports and jobs, both directly and indirectly. It should be kept in mind that every high-tech company in Israel has related local businesses and services providing it with goods and services.

The price of not making the adjustments made necessary by the tax reform is large and significant. There is no doubt that of all these solutions, the state can and should make sure that the companies enjoying such benefits are committed to growth, employment, substantial export volumes, and investment in Israel, because those are in the end our goals for the economy and society in Israel.

The creation of new financial solutions in order to maintain the attractiveness and development of human capital and the entry of additional population groups cannot be complete without addressing regulation and the ease of doing business in Israel. The long time and large number of approvals required for projects taking place in Israel is a drag on business efficiency. Israel is rated only 54th among countries in the ease of doing business. In order to increase the number of local and foreign high-tech companies, the ease of doing business and regulation for obtaining various approvals for operating businesses must be immediately improved.

Black clouds are on the horizon, and conditions that can lead to a perfect storm are emerging, but we can steer the Israeli economic ship away from them. Israel's high-tech sector is one of the world's strongest, and that fact that parties in the Israeli government recognize the problems, and are searching for and applying solutions for them, means that we can emerge strengthened from the current situation, and make sure that the Israeli economy's attractiveness for foreign investments will continue through our children's generation.

The author is CEO of Intel Israel.

Published by Globes [online], Israel Business News - www.globes-online.com - on January 15, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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