Google's Tax Bill for Waze: $373 Million

Only time Israel got more tax from a merger was the purchase of Iscar by Warren Buffett.

Google will pay $230 million in taxes on its acquisition of the property rights to crowd-sourced navigational app Waze.

Combined with the more than $143 million that Waze shareholders and employees already paid in taxes following Google’s $966 million acquisition of the company in June last year, Israel is expected to earn $370 million in tax revenue on the deal.

This is the second largest sum the state has ever received in tax revenue generated by a merger and acquisitions deal. The largest tax ever paid to the state on an M&A deal was the Wertheimer family’s sale of their remaining 20% stake in Iscar to Warren Buffet’s Berkshire Hathaway. That $2 billion deal generated an estimated $500 million in tax revenue.

At this stage it is not known where Google will register Waze’s intellectual property. However, it is believed that Google will seek to register the intellectual property to one of its foreign subsidiaries to avoid the relatively high tax rate levied by the United States on licensing fees generated by intellectual property.

Google typically registers intellectual property it acquires outside the United States in countries with lower tax rates. The funds Google used to buy Waze came from a company registered in Bermuda, so that is a likely location for where it will register the intellectual property.

An additional beneficiary of the Waze deal was the Economy Ministry’s Office of the Chief Scientist, which invested $1 million in Waze when it was founded. The transfer of Waze’s intellectual property outside Israel will require Google to pay the Chief Scientist $3 million beyond the tax payment.

Israeli tax authorities have made great efforts in recent years to maximize tax revenue from foreign high-tech companies acquiring local startups. In particular, the Tax Authority has been trying put an end to the phenomenon of foreign companies buying local startups and taking out of Israel their intellectual property at values substantially lower than the company acquisition price to minimize their intellectual property tax bill. Several companies have even recently gone to court with the Tax Authority to fight their tax bills.

The Waze deal was one of the largest to take place on the local high-tech scene in recent years, but Google did not try to find any loopholes around Israeli tax policy. It priced Waze’s intellectual property at $880 million, or about 90% of the total value of the acquisition deal.

Waze’s founders and executives demanded as part of the acquisition deal that the company remain in Israel, and, thus, its intellectual property as well. This demand was one of the reasons Waze did not close a deal with Facebook several weeks before the Google deal. Google bought Waze through its local subsidiary Google Israel. Consequently, it is Google Israel that is selling the intellectual property to another, foreign Google subsidiary. This transfer between subsidiaries created the tax liability of $230 million for Google Israel.

The latest tax payment is not expected to affect employees in Google’s Waze division. Waze has 120 employees, 20 hired by Google after the acquisition. Google intends to continue hiring at its Waze division.

Bloomberg