Israeli Firms May Face Dramatic Back Taxes Following EU Tax Ruling on Apple

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Apple Operations International, a subsidiary of Apple Inc, is seen in Hollyhill, Cork, in the south of Ireland August 30, 2016.
Apple Operations International, a subsidiary of Apple Inc, is seen in Hollyhill, Cork, in the south of Ireland August 30, 2016.Credit: Reuters

Israeli companies could be hit with hundreds of millions of dollars in assessments for back taxes after a landmark European Union ruling ordering Apple to pay 13 billion euros ($14.5 billion) for what it said were unpaid taxes.

The European Commission ordered the U.S. technology giant to pay Ireland the amount, which Dublin opposes, saying the tax breaks Ireland had given the company were tantamount to illegal state aid. The decision is part of a drive against what the EU says are sweetheart tax deals that some member states offer multinational companies to lure jobs and investment.

Harel Perlmutter, a tax attorney at Barnea & Company in Tel Aviv, said the ruling marked a new era in the tax treatment of multinational companies. That includes many Israeli companies that have based their European headquarters in countries, like Ireland, that offered the lowest tax rates.

Like Apple, they could find themselves facing retroactive tax bills, he said. Worse, the EU decision could spark a tax-break war that spreads to countries outside of Europe, other tax experts warned.

“Companies need to understand now more than ever that the world is becoming more complicated and reaching tax rulings with specific countries won’t stay in force forever. Even after enjoying special tax arrangements for years, they are likely to find themselves facing demands for dramatic changes in their payments,” Perlmutter said.

Like Ireland, Israel also offers companies tax breaks that are often quite generous and is planning a special regime for multinational high-tech companies that would allow them to pay a super-low corporate rate of as little as 6% for companies .

The tax plan, which is contained in the 2017-18 Budget Arrangements Law, aim to lure companies with intellectual property assets to base themselves in Israel where the government can then collect tax.

An accountant who represents multinational companies and asked not to be identified said that while the EU ruling only directly member states, it would have a chilling effect on other countries like Israel, especially since the Organization for Economic Cooperation and Development is leading a crackdown on tax shelters.

“The impact will be in the details of the legislation being constructed,” he said, adding optimistically, “The working assumption is that the research and development of the companies enjoying the tax benefits will actually be done in Israel, so registering the IP here won’t be fictional.”

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