Israel Plans to Issue Google and Facebook Precedent-setting Tax Bills Within a Year

Sophisticated tax planning by internet giants have allowed corporations to consistently pay low rates of tax, an issue Israel hopes to tackle

Google's office in Israel.
Google's office in Israel. Nir Keidar

Israel is planning to hand multinational internet corporations Google and Facebook a tax bill within a year, said Tax Authority chairman Moshe Asher. If Israel does manage to collect taxes from the internet giants, that would put it among a select group of countries that have started demanding taxes from these corporations, which until now have paid very little.

Work on calculating taxes based on a precedent-setting Tax Authority position paper from last year has already begun, said Asher. The Tax Authority is committed to seeing it through, even if it recognizes the process isn’t simple, he said.

“Ultimately taxes can be charged based on their operations in Israel,” said Asher.

The Tax Authority is working on figuring out how to make its calculations, and is in the middle of the process, he noted.

“Our goal is to obtain as much data as we can, even if many of these figures are held outside of Israel,” said Asher. “Within a year we’ll issue these companies tax bills.”

He acknowledges that it’s not simple, and notes that the Tax Authority will have to decide what percentage of the companies’ profits from their Israeli customers should be taxable in Israel.

The new Israeli policy comes amid a push by the OECD to cut down on international tax avoidance strategies. The OECD project, Base Erosion and Profit Sharing, involves a collaboration between more than 100 countries and jurisdictions. The Israeli stance on the BEPS project is relatively far reaching.

In April 2016, Israel’s Tax Authority published a position paper in the spirit of the BEPS project regarding corporate taxes and VAT paid by multinational corporations with internet operations in Israel.

Asher said he expects further OECD action could help Israel implement its goal.

“In the meanwhile the OECD is appointing an inspection committee and perhaps within a year or two they’ll have significant decisions that will help us,” he said. “We believe in the process, and ultimately we’ll be able to issue justified tax bills, even if we’re among the first in the world.”

Making money from online users Profits from October 2016 through September 2017

Israel’s corporate taxes are based on whether companies are considered to have a permanent presence in Israel. The position paper takes an expansive stance on internet companies, stating that under certain conditions they could be considered to have a permanent presence and thus be required to report their Israeli revenues. Such cases include companies with a significant number of contracts to provide online services to Israeli residents, offering services to a significant number of Israeli customers, or adapting their services to Israel, such as by offering a Hebrew interface, accepting payment in shekels or clearing Israeli credit cards.

International corporations sometimes use an Israeli company or contractor to assist or carry out their local operations; in some cases this could also be considered a permanent presence, under the tax regulations.

Israel’s corporate tax rate is 24% of profits. However, corporations can receive tax breaks for making significant capital investments, for example.

Splitting tax bills across contries

Multi-national companies like Apple, Google and Facebook have operations in many nations, and thus the question becomes how their profits - and the accompanying tax bills - are split across these various countries. Apple’s profits, for instance, could be attributed to several locations - the places where the company manufactures its devices, those where it develops them, those were it assembles them and those where it sells them, or any location where it has customers. The country’s intellectual property, which it can shift between nations legally speaking, has been one of the factors determining where it pays taxes on its profits. Therefore, companies often transfer their patents to countries with low corporate tax rates, such as Ireland.

The taxes that international corporations such as Google and Facebook pay in Israel can be broken down into several categories. The first involves the technology that Israel companies develop for international corporations that enable them to pull worldwide profits.

Google, Facebook, Amazon and Microsoft all have offices in Israel. They employ thousands of workers here in total, and over the past six years they bought out a combined total of more than 20 local companies.

Amazon recently stated that it would be opening a new center in Tel Aviv to develop technology for its Alexa smart shopping assistant. In this case, taxes could be calculated based on the cost-plus pricing method, which takes into account the company’s expenses, including salaries, rent, and payments to subcontractors. The company’s revenues would be from the international parent corporation.

This method offers the company profit with little risk. It has limited profit - and taxes - attributed to its Israeli operations regardless of whether the product loses money, or whether it proves to be a blockbuster.

Other tax calculating methods could include attributing to Israel a percentage of sales or worldwide profits.

The second aspect of the taxes multinational corporations pay in Israel involves their local customers.

International internet companies often pay very little local taxes in the places where their customers are located. Israel and other nations are looking to change that. Currently, companies such as Facebook and Google have online customers in Israel, but do not pay taxes to Israel based on them.

Despite the ongoing drop in advertising prices in Israel and around the world, Google and Facebook derive most of their revenues from advertising, and base their rates on their user numbers. These companies sell ads, and advance digital content for pay.

In the case of Amazon, it offers cloud services such as servers and data storage to Israeli companies. Google offers competing services.

International pressure

Beyond the OECD initiative, Israel is not the first country to try to crack down on the multinationals’ sophisticated tax planning.

In August 2016, in a precedent-setting ruling, the European Commission ordered Apple to pay 13 billion euros to Ireland, after ruling that the tax haven that Ireland had offered the company since the 1980s was not legal. The tax ruling came after a three-year European investigation. The European Commission ruled that Ireland had given Apple favorable tax conditions designed to illicitly pull business away from other countries. Ireland is still contesting the ruling.

Apple was one of the first U.S. companies to register in Ireland, in 1980, in exchange for a minimal corporate tax rate that was at some points as low as 1%.

The decision comes amid popular anger at Apple and other countries that shift their profits to countries with favorable tax environments.

Meanwhile, the multinational companies can be expected to resist Israel’s new tax initiative.

Dr. Oz Halabi, a partner and chair of the U.S. taxation department at the Pearl Cohen Zedek Latzer Baratz law firm in New York, states that several aspects of the new policy paper are not backed by law. For instance, Israel will have to legislate that a permanent presence can be based on online sales, as states around the United States have begun to do, he says.

Attorney Yaniv Shekel, a senior partner at the Shekel and Co. Law Offices, also expressed doubts as to whether Israel will be able to be one of the few countries in the world to tax the “digital economy.” Even if sales are being carried out in Israel, that’s not enough from a tax perspective, he says.

“Facebook’s real operation is its technology, and that will never be registered in Israel,” he says.