Israel to Begin Taxing Facebook and Google

Regulations on corporate income tax likely to affect global giants that offer internet services to Israelis.

A blimp reading 'Google must pay tax' floats in the Tel Aviv skies in April, 2016.
Baz Ratner/Reuters

Many of the giants of the online world offering services in Israel will be liable for local corporate income tax under new rules issued by the Israel Tax Authority on Monday, in a move that could yield the government substantial revenues.

The authority said it was adopting the measures, which will likely affect companies such as Facebook, Google and Amazon, as more and more services are provided over the Internet, distorting traditional models for how to collect taxes and from whom.

Until now, the Tax Authority has levied taxes on multinational Internet companies providing services to Israelis only if they were based in Israel. If the company was based in a country with which Israel has a double-tax treaty, it was only liable for tax if its local operations were designated as a permanent establishment — that is, with a physical place of business.

The new rules expand the permanent establishment designation to include overseas companies whose Israeli operations are done entirely online, so long as their Internet business in Israel is substantial. That would be the case if representatives of the foreign company actively seek Israeli customers and collect information and manage customer relations. In addition, a company will be considered to have a local permanent establishment if the services it provides online have been adapted to the Israeli market, for instance, using Hebrew-language content, pricing services in shekels or providing the option of paying with a local credit card.

Multinational companies may find themselves under the permanent establishment designation even if they use a local company as an agent for the Israeli market, the Tax Authority said. That would include situations where the local agent operates in Israel under the multinationals name or can set local prices unilaterally.

The Tax Authority understood that without a physical presence it wouldnt be able to levy tax on foreign Internet companies, so the circular published today ... tries to identify activities that until now were considered a permanent establishment, Lior Neuman, head of the tax department at S. Horowitz, told the Calcalist financial daily on Monday.

However, he warned that Israeli tax officials would face obstacles identifying foreign companies with no physical presence in Israel, adding that without the cooperation of the companies home governments, collecting the tax will be difficult.

The new rules come as the Organization for Economic Cooperation and Development seeks to revised tax rules among its members to prevent the phenomenon of corporate profits disappearing tax purposes amid a welter of different businesses spread across different countries or allow profits to shift to no- or low-tax locations where the business has little or no economic activity. Revenue losses from these practice, known as base erosion and profit sharing, or BEPS, are conservatively estimated at $100 billion to $240 billion annually, or anywhere from 4% to 10% of global corporate income tax revenues.

The new circular also reiterated new rules applying for multinational companies and Israels 17% value-added tax, which the Tax Authority addressed a separate circular issued three weeks ago. Under the new rules, multinational companies doing material business in Israel must register with the VAT authorities and pay VAT on local transactions for such things as digital books and music as well as software.

Two years ago, the High Court of Justice dismissed a suit against the government by Google and Facebook seeking to end the effective VAT exemption foreign companies enjoyed, saying it was satisfied that the state was formulating new rules to deal with the problem.