Staff from the chief economist’s office and the Israel Tax Authority in the Finance Ministry have been in touch with the U.S. Treasury Department in recent weeks over possible amendments to the tax treaty between the two countries following changes to American taxation policy.
A sweeping overhaul of the American tax code was passed by Congress in December.
The U.S.-Israeli tax treaty is among the most antiquated of the tax treaties to which Israeli is a party. The original treaty was signed in 1975 and it was amended in 1993.
The disparities between the tax deductions that the overhaul provides and what is allowable in Israel are expected to accentuate differences in the two countries’ tax regimes.
Israel is not the only country faced with amending its tax treaty with the United States. The model that generally guided the treaties the United States has signed with other countries is no longer appropriate for the new American tax regime.
The Israeli Finance Ministry has been in touch with American firms in an effort to understand the consequences of the new tax code on their business operations in Israel. The task will be particularly difficult until regulations and guidelines on the new tax code are issued. The responses from U.S. companies doing business in Israel have not been consistent and major American firms in Israel are still studying the situation. It is not clear to what extent they will be able to deduct payments of Israeli tax from their U.S. tax obligations.
However, one way or another, Finance Ministry officials reject the possibility that Israel would follow suit and cut the Israeli tax rate across the board in the corporate tax rate, as the United States did – from 35% to 21%. One argument against such a sweeping cut that there is no reason for similar cuts for Israeli companies, whose business is wholly conducted in Israel and who would not move abroad under any circumstances.
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Israel’s response to the new tax code is expected to focus on American companies doing business in Israel which are not currently entitled to tax concessions.