The U.S. technology giant HPE will pay the Israeli government 1.6 billion shekels ($450 million) in taxes for the intellectual property it obtained when it bought the Israeli high-tech company Mercury Interactive Corporation.
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The tax bill, whose terms were set in international arbitration, comes on top of the 1.5 billion shekels in taxes the U.S. company – one of two created by a breakup of the old Hewlett-Packard – had already paid on the Mercury deal. The 3.1 billion shekel bill, however, is far less than the 4 billion to 4.5 billion the Israel Tax Authority had originally assessed the deal for.
HP bought Mercury, an information technology management software and services company, in July 2006 for $4.5 billion and agreed at the time to pay 1.5 billion shekels tax at the time.
However, in 2009, with no ostensible connection to the first transaction, Mercury’s intellectual property was transferred out of Israel to its U.S. parent company at a substantially lower price of $963 million. The tax authority took the view that almost the entire value of Mercury was tied up with its IP and contended that the IP should be taxed at 25% of $4.5 billion.
HPE objected to the higher assessment and the decision was ultimately handed to an arbitrator, but before the decision was handed down the tax authority’s stance was accepted by Judge Samuel Borenstein of the Central District Court last month in a similar case.
That case was connected with Microsoft’s $90 million acquisition from another Israeli startup, Gteko, coincidentally also in 2006. In that case, the tax authority contended that the real value of the company was its IP.
The two cases are not atypical of high-tech merger and acquisitions deals, where the Israeli sellers prefer to sell their stock at a lower tax while the overseas buyers acquire the assets. Thus IP ends up being moved to the buyer in two-stage transactions as was done with Mercury, with the second stage done at a lower valuation. Unlike the United States, Israel has no rules to avoid tax on the second stage.