Treasury Edging to Ruling on Tax on Multinationals

Finance Minister Steinitz apparently favors a compromise that would set the rate at 15%, sources said yesterday after a round of discussions on the issue.

The treasury is moving closer to a decision on what level to tax multinational corporations, with Finance Minister Yuval Steinitz apparently favoring a compromise that would set the rate at 15%, sources said yesterday after a round of discussions on the issue.

The meeting ended without any final decision, but Steinitz asked aides to examine the legal implications of adopting the 15% rate, which was proposed by Tax Commissioner Doron Arbeli. The idea is to propose a rate to the multinationals that will encourage them to pay this year and next, at a time when the proceeds are badly needed by the treasury to make up for falling tax revenues elsewhere.

Officials have been debating at what rate to tax some $100 million in profits accumulated by multinationals between 2005 and 2011, but never paid out to shareholders or transferred out of the country - and therefore not liable for corporate income tax or the tax on dividends. Under the law, these profits are exempt from tax for 10 years, so long as they are invested in Israel. If the companies want to take the profit overseas, they are liable for the full rate.

Officials at the State Revenue Administration and treasury tax experts continued to favor a higher rate for the multinationals that would enable the government to collect $123.5 million in tax on the $100 billion. That still represents a pullback from the plans originally weighed by the treasury to collect between $30 billion and $40 billion.

Under their proposals, the multinationals would get a break on the corporate tax portion of the levy but would have to pay the full tax on the dividend. They would pay the corporate tax rate under the new Law for the Encouragement of Capital Investments, which went into effect a year ago, and not the rate under the old law, even if the profits were made at the time the old law was in force.

As a result, companies located in the center of the country would pay a 10% rate and those in the periphery an 8% rate. They would also have to pay a 15% tax on dividend paid. Since most of the companies are based in the center, they would be liable for the 10% rate or $10 billion. That is still much lower than the prevailing 25% rate. On the remaining $90 billion paid out as dividends after the corporate tax, they would pay the 15% rate, or $13.5 billion. All told, that would yield the state $23.5 billion.

To enjoy the lower corporate tax rate, companies would have to pay it either this year or in 2013. They also would be exempt from paying interest and inflation-linkage for the year between when they accumulated the profits and when they pay the tax, providing them with additional savings, officials stressed.

The treasury and the multinationals, which include companies like Intel and Teva Pharmaceutical Industries, are also at odds over the status of money that was transferred out of Israel already for the purpose of making acquisitions. The treasury insists these payments should be seen as dividends and taxed accordingly.

That would mean the companies are liable for taxes at a rate of 10% or 20% in the case of foreign investors and 25% in the case of Israeli investors.

Prime Minister Benjamin Netanyahu's office is urging a compromise. Officials there say the amended investments law was not written in enough detail, setting the stage for disagreement between the treasury and the multinationals.