U.S. Tax Reform Sparks Worries in Israeli Tech Sector

Legislation could encourage foreign, Israeli firms to move operations to the United States

U.S. President Donald Trump displays his signature after signing the $1.5 trillion tax overhaul plan in the Oval Office of the White House in Washington, U.S., December 22, 2017.
\ Jonathan Ernst/REUTERS

Israel's high-tech sector could be hurt by the tax reform approved by the U.S. Congress last month, a paper prepared by the Israel Innovation Authority and obtained by TheMarker shows.

The U.S. tax reform is complicated and many of its details are still being ironed out, but government officials and industry leaders have already identified several worrying elements.

One is the plan to lower the tax on income derived from intellectual property like patents to 12.5% for companies domiciled outside the United States.

Israel had acted in the past year to lower its tax rate on intellectual property to as little as 6% to encourage more global companies to register their IP in Israel and let the government collect tax on it, but the extra U.S. tax is likely to frustrate the Israeli plan.

Another concern is a little-known clause in the reform legislation called the Base Erosion Anti-Abuse Tax, or BEAT, which targets large companies that have been reducing their tax bills through cross-border payments they can then deduct in the United States.

The BEAT provision, which applies to companies with annual receipts of $500 million or more, aims to circumvent that tax avoidance with a minimum tax of 10% on such income. That measure could raise the tax bill of the biggest Israeli tech and non-tech companies when they import services from their home offices in Israel.

The reform will likely affect the scores of global companies with at least 50% of their shares held by Americans that have research and development centers in Israel by increasing the taxes on the R&D services they provide. Many companies may decide to return R&D and other functions to America from abroad, the innovation authority fears.

For startups, American corporate investors – who play a growing role in funding Israeli startups – are expected to pressure entrepreneurs to domicile their businesses in the United States because the reform will face double taxation on their gain when they exit.

In addition, an investment fund or company that invested in a U.S. company using debt finance could deduct 50% of interest costs. That figure will now fall to 30%.

The worries are deep enough that some of Israel's biggest companies, including Check Point Software and drug maker Teva, met a week ago with treasury chief economist Yoel Naveh to discuss strategy. The meeting also included representatives of multinationals present in Israel like Intel and Microsoft.

Two other meetings were held over the past week with officials from the treasury, the National Economic Council, the tax authority and the innovation authority that included not only executives but officials from Israels biggest accounting firms to assess the tax reforms impact.