The decision of President Donald Trump to cut the US business tax rate to 15% could have a profound impact on Israeli companies.
Beneli Tax Boutique CEO Adv. Ilan Ben-Eli said, "Cutting the business tax will have a dramatic impact on the strategy of more than 90% of Israeli companies that have US operations."
He added, "Over 90% of Israeli companies operate with a structure of an Israeli company and a US subsidiary with the US subsidiary performing very minimal functions of distributing products and services. At the moment corporate tax in the US, between the federal and state taxes, is effectively 40%, and that's before taking into account profits that can add another 7.5% effective tax, as there is a 12.5% dividend tax in the US."
"So if the profits are left in the US, 47.5% tax is paid compared with a tax rate of 24% in Israel, and if you enter Israel's Law for the Encouragement of Capital Investment, you can benefit of tax rate between 9% and 16%. Therefore, most companies channel most of their profits to Israel where the tax rate is lower. Trump's plan reflects a sharp fall in the tax rate and that will dramatically change the tax strategy of many companies."
Israeli companies that have previously gone through other countries including Switzerland and Singapore that offer attractive tax rates to lower their effective tax bill in the US will also return quickly to the US. Ben-Eli said, "What Trump is trying to do is to compete with these countries. If today Switzerland has an effective tax rate of between 10% and 15%, then Trump wants to compete with them and with lowering the tax to 15% and other tax plans that he is proposing, he is offering a very attractive package that will significantly channel operations to the US."
He continues, "This also has, apparently, major potential for raising the value of companies operating in the US. You can understand for yourselves what this dramatic tax cut does for a company's net profit multiples. There are those that claim that it can immediately raise a company's value by 30%.There are also potential ramifications for strengthening of the dollar, which could have a major (positive) influence for Israeli exporters."
Between Trump's headlines and the actual results there can always be a significant gap but the assumption is that the tax cuts will pass (Congress), experts believe, and this will be a problem for Israel.
Ben-Eli said, "There will be major competition over movement of profits. To put it crudely, Trump is not an idiot. He understands that everybody worldwide is cutting taxes. In Israel, practically every exporter reaches 16% tax and anybody prepared to travel 45 minutes to Yokneam can lower taxes to 9%, and Trump is looking to compete with that. If until today we have said to an entrepreneur seeking to found a high-tech company, 'come and set up an Israeli company and put your IP into an Israeli company,' well now with a federal tax of 15%, the dialogue is completely different.
S. Horowitz & Co. managing partner and tax department head Adv. Leor Nouman agrees and adds, "We are talking about a dramatic influence on the tax structure of many Israeli companies. Today there is always the desire to transfer revenue to Israel or to countries with low tax rates but a change in the US tax rate will turn around the situation and encourage leaving revenue in the US and it looks like this will hit tax collection in Israel."
Goodbye to Apple and Google's revenue
He added, "Today the US corporate tax rate stands at 35% and can reach 38%-40% in certain situations and that has been a catalyst for most multinational companies, including companies with connections to Israel - which is just about every company in the Israeli economy - to transfer as much revenue as possible to Israel. For example, large international companies including Apple and Google, and every huge company that moves revenue and registers their IP in Luxembourg and Ireland and all sorts of countries with low tax rates, did this because the tax rate was only 5% in those countries while in the US the rate was 35%. In Israel the tax is 24% but with the Law for the Encouragement of Capital Investment this can fall to 12% and sometimes 6%, so there was of course an interest in transferring revenue to Israel. But if Trump's plan is passed, the situation will change in favor of the US. Israel will lose no small amount of income. Many countries are going to have to say goodbye to income from companies like Apple and Google."
Published by Globes [online], Israel business news - www.globes-online.com - on April 27, 2017
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