Israel Acts to Counter Trump’s Tax Reform

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U.S. President Donald Trump displays his signature after signing the $1.5 trillion tax overhaul plan at the White House, December 22, 2017.
U.S. President Donald Trump displays his signature after signing the $1.5 trillion tax overhaul plan at the White House, December 22, 2017.Credit: JONATHAN ERNST / REUTERS

U.S. President Donald Trump’s tax reforms, approved by Congress in December, were meant in part to encourage U.S. investors to invest in U.S. companies. That was of great concern a big worry to Israel, whose high-tech industry, in particular, relies heavily on foreign investment.

Now Israel is fighting back in one small way: The Israel Tax Authority said Tuesday it was introducing a “green track” to make it easier for Israeli entrepreneurs to transfer corporate assets abroad.

That may sound like Israel is shooting itself in the foot, but the tax authority reasons that if Israeli entrepreneurs feel confident that of at a later date they need to move their startup’s assets to the United States, they won’t run into red tape.

That means that when they form companies they have no reason to register its assets — in particular its intellectual property, which for a high-tech company is often the most valuable — in the U.S. The tax authority looks at companies that not only do their research and development in Israel but register their intellectual property in the country as “whole companies.”

“The new track will give another boost to the establishment of Israeli companies in general and ‘whole’ companies that have their IP in Israel in particular, while providing business certainty and flexibility and significantly shortening the time it takes to complete a tax ruling relating to changing ownership structure,” the authority said in a statement.

While Israeli tech companies typically conduct their R&D at home, they often have good business reasons to register abroad the business and/or the IP being created by their Israeli R&D teams. American investors often prefer a U.S. domicile and being an American company makes it easier to complete an initial public offering on Wall Street.

The Israel Tax Authority has also a good reason for wanting IP registered in Israel: If R&D is conducted in Israel but the IP is held broad, it only collects taxes on a cost-plus basis, a theoretical profit based on how much the company spends on R&D.

The upside of this arrangement is that Israel collects taxes whether or not the company is profitable; the downside is that if the R&D yields a major new commercial product or service, the profits will be deemed as if earned abroad and some other country’s tax authorities will enjoy the windfall.

The new green track is one of a series the tax authority is developing, but this one for asset transfers was designed specifically with the Trump tax reform in mind, in particular its Global Intangible Low-Taxed Income.

GILTI is a tax on the profits of foreign subsidiaries of American companies, set under the U.S. reforms at 10.5% until 2025, when it is to rise to 13%. Until now, there was no tax like this at all, so long as the money wasn’t repatriated to the U.S.

“In this situation an Israeli company can be a disadvantage because it will be taxed by the Americans, so it might be better for the company set itself up in America from the start,” explained Sharon Shulman, a managing partner at Ernest & Young specializing in taxes, to TheMarker earlier this year.

Specifically, the green track will give companies seeking to transfer assets out of Israel automatic approval, so long as the tax authority doesn’t object within a certain time frame and the application meets certain conditions, among them that Israel has a dual-tax treaty with the country where the assets are being moved.

Until now, each application needed specific approval from the tax commissioner.

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