Big Business, We Don't Forgive You - Pay Tax!

Netanyahu and Lapid must join OECD plan to make big companies pay.

Some of the largest corporations in Israel and the world had good reason to atone on Yom Kippur.

It has become apparent that the largest corporations -- the ones with the biggest market share and best placed to dictate market prices -- not only pay their executives the most. They are also the most frugal when it comes to paying tax, and sharing their joy with the public.

Many will recall how Apple paid an effective tax rate of around 2% in Ireland because its Irish subsidiaries are not obligated to pay U.S. corporate income tax. The company was alleged to have paid less than its share of income tax by concealing foreign earnings and intellectual property.

Apple obviously isn’t alone. Other major U.S. corporations well in the black that paid little or no tax this past year include Google, Microsoft and Pfizer. IBM paid at a rate of just 3% last year, Exxon Mobil paid 1%, and General Electric, remarkably, hasn’t paid any tax whatsoever in the past five years.

The situation in Israel isn’t much better. Here the method of tax avoidance in recent years has been based on the Encouragement of Capital Investments Law, which gave a 10-year tax exemption to companies that invest in the north and south of the country and waive the government subsidies to which they are entitled for doing so. The law was a boon to companies with plenty of money, and spun out of control as the global economy expanded and corporate profits skyrocketed.

This is how Teva Pharmaceutical Industries, Israel’s largest company in terms of market value, barely pays any corporate tax and will probably continue paying little or nothing for years to come. The situation is much the same for Check Point Software Technologies, Israel Chemicals and foreign companies operating in Israel like Google (once again) and Intel.

The main problem with the 2013-2014 state budget, according to many economists, is that most of the new taxes were imposed on the middle class and on families and individuals, while the business sector and the rich weren’t touched and continue to benefit from their tax-planning schemes. When will it end?

Ironically, it was Finance Minister Yair Lapid who publicly lambasted aggressive tax planning. In May he promised he would “fight against pyramid enterprises, concentration, tax avoidance and monopolies.” Yet no real reform of tax avoidance has been made public.

Then there is the plan for “rescuing the stock exchange” that was announced last week by Israel Securities Authority chairman Shmuel Hauser. It is based in part on reducing taxes on profits from securities, in an effort to convince investors to change their focus from real estate to stocks and bonds. Hauser claims tax collection on the whole would actually rise, but such a move would again benefit those with surplus money available for this type of investing. The same effect could be achieved in the opposite manner: by levying or raising taxes on investment homes.

OECD aims to halt shopping for tax havens

Lapid is in luck: Help has arrived from abroad. If he so chooses, the finance minister can take part in a new and impressive international war declared recently by Jose Angel Gurria, the secretary general of the Organization for Economic Cooperation and Development, against tax havens for big business and the rich. The finance ministers of many countries have already joined up.

The OECD plan includes no less than 15 ambitious measures and, according to Gurria, will bring about the greatest reform in international taxation since 1920. The plan, which would take two years to implement, aims to close the gaps between the tax regimes of different countries, reinforce each country’s tax laws, block arbitrage opportunities between markets, and impose greater restrictions on which expenses can be deducted. The idea is to prevent the upper crust and the international corporations from shopping for the ideal tax haven. The OECD also seeks transparency from companies regarding their profit and tax reports for every jurisdiction in which they operate.

Of course, this is a colossal project, since each country has dozens, if not, hundreds, of bilateral tax treaties, and there are dozens of countries serving as tax havens that don’t belong to the OECD. It’s easy to understand the cynics who say it won’t work, but they seem not to appreciate the social unrest gripping citizens frustrated by inequitable taxes, in democratic and non-democratic countries alike. From the United States to Egypt, Brazil and various European countries, the populace is fed up with large corporations and wealthy individuals who don’t share their wealth, and their leaders are under pressure to do something about it. It’s no coincidence that economic inequality is such a hot topic, and it’s no coincidence that the rich people of the world are worried about their future, and even their personal safety in some cases.

Tax reforms, here we (should) come

Will Prime Minister Benjamin Netanyahu, Lapid and the entire Israeli government join the OECD initiative and the new spirit it is infusing into the war against tax avoidance? We Jews have a tendency to try to outsmart the gentiles and come out ahead. This includes turning Israel into a country where foreigners pay low taxes or no tax at all in order to entice them into transferring their wealth from abroad or moving here.

Someone will no doubt propose that, here in the Holy Land of all places, new tax shelters ought to be created to attract the money pouring out of those tax havens that will soon be shut down. But such ploys are perhaps better suited to small, remote Caribbean islands; they will not be tolerated here by the international community or the Israeli public, which has come to realize it doesn’t actually benefit from the bank accounts or tax breaks of foreigners in Israel. The public understands that it is losing out when well-heeled foreigners drive up the price of real estate in cities like Tel Aviv and Jerusalem. And it understands that the unpaid taxes of the wealthy and the large corporations just help the rich get richer while contributing very little to the vast majority of society.

Therefore, Netanyahu and Lapid must join the OECD’s international initiative and take the opportunity to reform Israel’s tax system too and make Israeli society more equitable within a few years. The 1% club and its representatives will certainly pull out all the stops to make sure this doesn’t happen, but this time the 99% can be expected to come out on top thanks to their frustration with the cost of living and housing prices, along with their anxiety over their economic future. If Netanyahu and Lapid don’t go along -- and the media make sure the public knows just what is or isn’t going on -- they may have reason to fear the next election.

Reuters