U.S., Israel Expected to Announce Talks on New Bilateral Tax Deal

The U.S.-Israeli agreement is outdated, and contain some of the highest tax rates in the world, at a higher rate than U.S. bilateral agreements with other nations

Israeli Finance Minister Moshe Kahlon gestures as he speaks during a news conference, in Jerusalem, October 9, 2018.
REUTERS/Ronen Zvulun

U.S. Treasury Secretary Steven Mnuchin and Finance Minister Moshe Kahlon are expected to announce on Monday that they will be appointing a team to reexamine the Israeli-American bilateral taxation agreement. Mnuchin is launching a Middle East tour.

Much has changed since the agreement came into force in 1995. Israel went from being a developing nation to a developed one, and from importing capital to exporting capital.

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Representatives of both countries are expected to determine which aspects of the code need updating, and may recommend negotiations to update the agreement, which is designed to prevent double taxation in cases where companies or individuals have ties to both the United States and Israel.

The agreement has been in need of updating for a while. At the beginning of the year, representatives of the Finance Ministry’s Chief Economist’s Office and the Tax Authority held discussions with U.S. Treasury officials about how this could happen.

But don’t expect far-reaching changes too quickly. It is likely to take several years for any new agreement to be hashed out and take effect.

Double-taxation agreements are hashed out between two countries to determine what happens in cases where income or assets are linked to both nations. The U.S.-Israeli agreement is outdated and requires companies to pay noncompetitive tax rates on dividends, interest and royalties based on figures set decades ago. These are some of the highest tax rates in the world, and are also higher than U.S. bilateral agreements with other nations.

Dr. Amir Chenchinski, a tax expert and a senior manager at the U.S. desk of Ernst and Young Israel, says the agreement is an artifact of an era when Israel had far less negotiating power.

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One of the main problems with the agreement is the tax withholding clauses, which Chenchinski calls an impediment to investments by Israeli companies in the United States and vice versa. The agreement sets a tax of 12.5% to 25% on dividends, 10% to 17.5% on interest and 10% to 15% on royalties. When a U.S. company pays dividends, interest or royalties to an Israeli company, tax is withheld in the country where the revenue is generated, and vice versa. The parent company reports the revenue in its home country, and receives a tax credit for the tax already paid. If the foreign tax is higher than the tax in the home country, the company pays no additional tax.

Mnuchin praised investment opportunities in Israel on Sunday and said Washington would increase its participation in infrastructure projects there.

“This is really a great place for investments, particularly technology investments,” Mnuchin told reporters in Jerusalem.

With reporting by Reuters.