Economy Ministry demands tax breaks for Israeli high-tech cos

Eli Cohen Photo: Dudi Vakhnin

Minister of Economy and Industry Eli Cohen has asked the new Israel Tax Authority head Eran Yaakov to consider measures benefiting Israeli companies operating in the US market.

The Ministry of Economy and Industry and the Israel Innovation Authority are advocating a series of concessions and tax breaks for Israeli companies, mainly in the high-tech sector, in response to the tax reform declared by US President Donald Trump. Sources inform "Globes" that Minister of Economy and Industry Eli Cohen has asked the new Israel Tax Authority head Eran Yaakov to consider measures benefiting Israeli companies operating in the US market or against companies from the US.

In his appeal to Yaakov, which "Globes" has obtained, Cohen stated that the measures had been formulated as part of a comprehensive evaluation by the Israel Innovation Authority designed to assess the consequences and potential risks to which companies from Israel have been exposed following Trump's tax reform.

The main recommendations that Cohen sent to the Tax Authority were reaffirmation of the existing tax convention between the US and Israel, together with the introduction of changes in it to make it possible to lower the tax rate on dividends between the countries, accelerated depreciation rates for enterprises in Israel, a tax credit for Israel companies on payment of BEAT, an increase in the beneficiary tax rate to 10% and lowering the withholding tax, and others. Israel Innovation Authority CEO Aharon Aharon and charman and Chief Scientist Dr. Ami Appelbaum took part in formulating the recommendations. The main recommendations were also delivered to Prof. Avi Simhon, head of the National Economic Council in the Prime Minister's Office, and Minister of Finance Moshe Kahlon.

"The Ministry of Economy and Industry, through the Innovation Authority, continues to follow the clarifications from the US Internal Revenue Service," Cohen wrote to Yaakov. " I want the Ministry of Economy and Industry and the Tax Authority to act jointly to help Israeli companies cope with the consequences of the US tax reform."

The main concern of the Ministry of Economy and Industry and the Innovation Authority is that implementation of the dramatic US tax reform declared by the US president in December 2017 will detract from the Israel's attractiveness for investments from leading companies, which will prefer to consolidate their activity within the US, while intensifying competition between groups of international companies and startups with high productivity.

"In the long term, implementation of the reform in the US will cause companies to prefer opening development centers in the US instead of in Israel, because of the narrowing of the tax differences between the two countries when the US corporate tax rate is cut from 35% to 21%. Under the Law for the Promotion of Capital Investment, a company currently operating from a center in Israel pays 16% corporate tax, and a company operating in an outlying area pays 7% corporate tax. We do not want the US reform to detract from the effectiveness of this law, and we therefore expect a series of measures that will prevent tax distortions faced by Israeli companies as a result of the new situation," a senior economic source involved in the matter told "Globes."

The source added, "The high-tech sector is an important part of economic activity in Israel, and we have a relative advantage over the rest of the world in competition, both at the level of engineers and the level of technologies, especially against Silicon Valley. Up until now, one aspect in Israel's favor has been the attractive tax environment, and narrowing the difference in this poses a threat to Israeli companies in the long term. Failure to prepare for the new situation is liable to create an undesirable future situation, including a drying up of investments in the economy and a substantial decline in opening development centers of major companies in Israel."

In recent weeks, as part of his tax reform, Trump ordered an increase in customs duties on imports of aluminum and steel to the US in order to protect US industries, especially against large-scale imports of steel and aluminum products from the Far East.

In response to this measure, as reported by "Globes" two weeks ago, the Ministry of Economy and Industry officially asked the US Department of Commerce to exempt Israel exporters from these measures, similar to the exemption granted by Trump to a number of countries, including Australia, the European Union, Mexico, and others.

Even before this request, the Manufacturers Association of Israel asserted that Israeli companies export relatively small quantities of metal amounting to tens of millions of dollars annually to the US market, but that imposing a high tax on this trade would harm these companies.

According to the Manufacturers Association of Israel's figures, 50-60 Israeli companies are liable to suffer from this plan. Up until now, the US authorities have not responded to the official request submitted by Israel in this matter. It is believed that a decision will be taken in the US in the coming weeks.

Published by Globes [online], Israel business news - www.globes-online.com - on April 12, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Eli Cohen Photo: Dudi Vakhnin
Eli Cohen Photo: Dudi Vakhnin
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