Sorry Google

Israel Seeks to Tax Local Profits of Multinational Internet Giants

Tax authority hopes closing a loophole will open access to some of the billions that companies like Google and Facebook shield by shuttling profits.

Eyal Toueg

With the aid of sophisticated tax planning, multinational Internet mammoths avoid paying taxes on their profits in Israel — and in most other countries — but the Israel Tax Authority is planning to get them to pony up.

Companies such as Google and Facebook take advantage of loopholes in international tax treaties to which Israel is signatory as well as operations in tax havens such as Ireland to keep their tax bills low. In 2010, the Bloomberg news service reported that the U.S.-based Google had reduced its overseas taxes for the previous three years by $3.1 billion, to an overseas tax rate of just 2.4%, by funneling most of its foreign profits through Ireland and the Netherlands to Bermuda.

It is estimated that more than 50% of Google Israel’s revenues come from advertising placed by Israeli companies in foreign markets, with the rest coming from local advertisers targeting the Israeli market.

The vice president for marketing of a major Israeli company once told TheMarker that while he conducts his commercial negotiations with Google with representatives of Google Israel, in the end the contracts are signed with Google officials in Ireland, where the Internet giant has a significant number of Israeli employees.

The head of the Israel Tax Authority, Moshe Asher, told an Institute of Certified Public Accountants in Israel convention last week that his agency was close to issuing for comment the draft of a new tax advisory, the fruit of more than a year of work, that would allow the agency to collect VAT and income tax on the local activities of foreign Internet giants. The change is made possible by a reinterpretation of existing tax law, and does not require new legislation.

Agency officials declined to give details of the changes. The tax authority has been trying, without success, for at least four years to introduce a reinterpretation that would enable the taxation of these companies. The agency’s counterparts abroad have been similarly unsuccessful.

Only after the proposed interpretation is circulated for public comment will the tax authority decide whether it is in a position to act on the reinterpretation.