The Party’s Over: Google and Facebook Will Pay Taxes in Israel

Israel's Tax Authority is negotiating with multinational internet giants over the final legislation

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Facebook CEO Mark Zuckerberg testifies before a House Energy and Commerce hearing on Capitol Hill in Washington, on April 11, 2018.
Facebook CEO Mark Zuckerberg testifies before a House Energy and Commerce hearing on Capitol Hill in Washington, on April 11, 2018.Credit: Andrew Harnik,AP

The Israel Tax Authority has submitted tax assessments to the multinational tech giants operating in Israel and is negotiating with Facebook and Google, among others, over the final bill.

In so doing, the Tax Authority and the Antitrust Authority made good on a pledge they made at a special session of the Knesset Economic Affairs Committee exactly one year ago, that the issue of tax and economic concentration of these companies would be examined and action taken.

The Tax Authority said some companies have already received a tax bill and the remainder will receive one soon. Facebook and Google declined to comment.

As for the Antitrust Authority, there have been no results so far. About a year ago, Antitrust Commissioner Michal Halperin said her agency would devote 2018 to studying the economic concentration and influence on the Israeli economy of the internet giants, including Apple, Microsoft and Amazon. The agency wants to know how these companies affect the local high-tech industry in terms of potential damage as well as investments in and the future acquisition of Israeli tech firms. The goal is to examine the multinationals’ compliance with Israeli antitrust law and to take punitive measures, such as fines, if needed.

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In September the Antitrust Authority issued a request for comments from members of the public, particularly from the high-tech industry, in an effort to assess the challenges to innovation and competition in Israel posed by the international tech giants. In November, the agency requested an extension to continue to gather complaints.

In November, Halperin announced at a Knesset session on antitrust law reform that the Antitrust Authority had received complaints about Google, but not Facebook. She added that since these companies have a huge market impact on firms providing a free product, the authority needs to conduct a new economic analysis. According to Halperin, the accepted parameter for market analysis is price. But economic analysis of the internet world, where products are given for free, is nonexistent. Halperin said that there was no need to change the antitrust law to deal with the online giants, because the existing laws meet all the needs in this area. She added that the goal was not to analyze how big and strong these companies are in the markets where they operate, but rather whether they are taking unfair advantage of their power.

The Antitrust Authority responded that it is still in the investigative phase, and that “we have received responses from Israel and abroad to the call, and we are now processing responses.”

How much should the state take?

The Tax Authority’s concern is in taxing the growing digital economy. The activity of multinational companies extends across many countries; the issue, which also determines the final tax bill, is how to divide taxes on company profits among the various countries.

Taxation of internet firms is a new and developing realm and not yet fully formed legally speaking. The Israel Tax Authority is just one player in a crowded field. In many ways Israel is farther along in this area than many other Organization for Economic Cooperation and Development member states, demonstrating what is considered an aggressive taxation policy toward the digital economy. Just recently, France announced that it would not wait for a general European decision in the matter, and from January 2019, it would impose a new local tax on technology companies, including Google, Apple, Amazon and Facebook. The new tax is expected to bring in 500 million euros in tax revenue.

In 2016 the Israel Tax Authority published broad guidelines on the taxation of foreign corporations that provide services over the internet to Israeli residents. The document followed the spirit of an OECD flagship project from 2013 on international tax planning of global firms. The next phase is to question these companies’ customers to gain a better understanding of the relationships and the nature and extent of the companies’ involvement in Israel. When the Tax Authority issues a tax bill to a company, there must be a legal foundation for the bill and a method for determining how much of the company’s profits should be attributed to Israel.

In November 2017, then-head of the Israel Taxation Authority Moshe Asher said that taxation of the digital economy had already begun and the authority would go all the way with it, by means of three of its departments: professional, legal and international. “The goal is to obtain as much data as possible, most of which is not found in Israel. Within a year we will issue tax bills to these companies. We believe in the process, and that at the end of the day we’ll be able to [show] a foundation for the taxation, and we will be among the first in the world,” Asher said.

Asher’s successor, Eran Ya’akov, also ascribes great importance to taxing the digital economy and he is closely following the process.

The steps now being taken can end with consensus regarding the taxes the companies will pay. If consensus is not reached with the Taxation Authority and the companies claim that they have no tax debt in Israel with regard to its Israeli clients, or that they have less of a debt than the authority is demanding (Facebook, for example, associates its income from digital advertising to the countries where it operates), they can appeal to the Tel Aviv District Court and then the losing side can appeal to the Supreme Court. Even if the matter reaches the courts, it could end with a compromise that both sides can live with.

Amazon wants a piece of the pie

In a conference at the Knesset in October on law and the internet, the Knesset Research and Information Center presented data on tech multinationals’ Israeli activity. It found that Facebook is the dominant internet company in Israel overall. Google dominates the category of search engines and has a strong competitive advantage in browsers and in smartphone use based on its Android operating system. Facebook and Google have purchased additional platforms, such as YouTube and Instagram, and expanded the array of products they offer free to users in exchange for watching ads. According to the Knesset research center data, in 2017, the value of digital advertising stood at 1.3 million shekels ($350.2 million).

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The business model that Facebook and Google base most of their income on is selling advertising space on the web, and controlling the whole advertising chain and a great deal of information about their users. According to the research company eMarketer, between them these two companies control half of the world’s digital advertising market; half of every dollar spent on digital advertising goes to them and the other half is distributed among the rest of the content platforms. And so these two firms are considered a duopoly in online advertising.

At the meeting in November participants mentioned a third major player in online advertising making inroads in Israel –Amazon. At the moment it only holds a 4% market share, but this is expected to grow significantly in the coming year. Halperin said at the meeting: “I very much want Amazon in Israel it will lead to a reduction in prices and we welcome its presence in Israel.” She then immediately added: “The internet giants who want to take part in the Israeli economy must behave in keeping with the local rules. If they harm competition in Israel and the Israeli consumer — the fact that they are global will not prevent taking steps against them if they break the rules.”

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