Google and Facebook to Pay More Tax in Israel, if State Plan Succeeds

While Israel Tax Authority has joined OECD in a worldwide effort, it is taking its own actions unilaterally in drive to collect more tax from global Internet firms.

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With Internet companies and multinationals in its sights, the Israel Tax Authority is working toward issuing a new set of tax guidelines or sharpening existing ones by the end of this year.

Companies like Google and Facebook are believed to be earning between NIS 500 million to NIS 1 billion in revenues a year in Israel. Athough the tax authorities won't reveal how much they collect from them, the amount is thought to be negligible.

Taxation will be based on a clearer definition of the component of the companies' profits earned in Israel, as opposed to the current situation whereby the company is mainly taxed according to the jurisdiction in which it is registered, or where the business actually operates. The most notable new component will be a test of the company's "prevailing economic links," with greater emphasis placed on the source of real economic profits for those with virtual operations too.

Practices engaged in around the world and trends expected to gain traction, adjusted to the Israeli tax code, are now under examination at the tax authority. The new tax assessments will be performed on the basis of thorough checks into fair transfer prices mainly used in internal corporate transactions, for instance between a subsidiary and its parent company. The authority will strive to make its assessments based on realistic transfer prices.

The OECD (Organization for Economic Cooperation and Development) has recently decided to push for a change to global taxation rules and put an end to the practice of large and profitable companies avoiding taxes by using a host of so-called “tax strategies,” which sometimes resulting in zero liability. The OECD changed its policy based on fears that an erosion of tax revenues threatens economic collapse and deepening socioeconomic disparity.

The Israeli Tax Authority is participating in the two-year global effort but meanwhile has decided to push unilaterally towards collecting tax along lines taking shape around the world.

The main drawback is that the new policy will have to rely on multinationals cooperating by providing data, but the companies may only cooperate with the new tax regime only after loopholes have been closed on the global level.

One direction under consideration by the OECD is having every country accord itself a share of profits earned by companies operating under its jurisdiction, even among those registered in another country that is considered a tax haven. For instance, a company like Germany’s SAP, which makes management software and maintains a subsidiary in Israel for selling it, integrating it within the organization, and providing technical service afterwards. Under the plan the tax authority will examine the profitability of operations in Israel and tax the share contributed by the Israeli subsidiary to the global company's profits.

Calculation of the profits won't be based on the company's figures alone if the Tax Authority suspects that the profits they present aren't realistic.

The "prevailing economic links" test could be described as follows: Let's say a company developed software in Russian that's only relevant to the Russian market. Now, tax is paid where the server is located, usually a country serving as a tax haven, although all its customers are in Russia and its entire marketing campaign is aimed there. Clearly the prevailing economic link is to Russia and therefore Russia, as a tax territory, has the right to tax the company.

Facebook declined to respond. "Google conforms to the tax laws in every country in which we operate, including Israel,” a spokesman said. “In reality most governments use tax incentives to draw foreign investment to generate jobs and economic growth. Companies naturally respond to these incentives. That is one of the reasons Google established its European headquarters in Ireland, together with the ability to recruit people and expand operations. If politicians don't like these laws they have the power to change them. In any case, our effective global tax rate in 2012 was 20%."

Google Israel headquarters. Contracts are negotiated in Israel, but signed in Ireland.Credit: Eyal Toueg

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