The Israel Tax Authority is assessing the activity of Facebook and Google in Israel, sources inform "Globes." The purpose of the probe is to study the companies' business in Israel in depth in order to recommend whether they should be taxed in Israel. Tax Authority investigators recently met with media companies and customers that work with Google in order to learn about the two companies' operational methods in the local market.
"Globes" was told off the record that the investigators asked detailed questions about the degree to which Facebook and Google personnel was involved in campaigns. They tried to understand whether, and if so, how, the companies' employees helped the agencies and customers to design campaigns, segments, and targets; whether they recommended increasing budgets; and to what extent they were commercially involved.
It appears that the investigators are trying to establish a basis for asserting that Facebook and Google's Israeli teams are deciding on measures by themselves, not merely implementing recommendations from overseas, and have real and independent relationships with agencies and customers.
Sources who met with the investigators got the impression that they were doing very thorough work, including the smallest details of how the business is being conducted in Israel. The sources said that the investigators apparently believe that they have evidence that Google and Facebook have a relationship with the local market that justifies assessing them for taxes.
Facebook and Google are registered as companies operating in Ireland, a known tax shelter, which enables them to avoid paying taxes in Israel. The two companies have claimed for years that they have no sales activity in Israel, and the only infrastructure they have built here consists of consultants.
The revenue lost by the state is huge, because the two companies hold ever-increasing shares of the advertising market. No one has precise figures about the volume of their business, most of which involves either activity in the local advertising market for a local audience or activity by Israeli companies located in Israel and advertising in overseas markets.
The following estimates give an idea of the volume of advertising in the local market: digital advertising accounts for more than 30% of all advertising in Israel, and 60% of digital advertising consists of advertising on Google and Facebook. A crude estimate is that NIS 800 million in local advertising goes through Facebook and Google. Google is the more significant player, being responsible for NIS 550-600 million in advertising, with Facebook accounting for the rest.
Regulatory questions
This, however, is only the tip of the iceberg for the companies' business in Israel. There is an entire world whose extent is unknown - the money spent by Israel companies on overseas advertising, such as in the gaming sector. Market sources assert that this business is significant.
Google has been doing business in Israel for longer than Facebook; its main office in Israel has existed for over a decade. Facebook opened its office in Israel in 2014, but the format of its activity is not very different from that of Google. The media companies say that both companies have offices and employees working with the local market in Israel that take part in designing campaigns, not just putting already prepared campaigns on the platform. Google and Facebook have creative personnel, part of whose job it is to create more effective campaigns.
Despite the considerable revenue derived from operations in Israel by both companies, however, they pay no tax on it, because they are not Israeli companies, and they have argued up until now that all their business in Israel consists of keeping sales personnel and consultants. Israel is not the only country facing difficult regulatory questions involving these two giant international companies. Regulators throughout the world are coping with difficult questions arising in the digital era, in which companies constitute a kind of supra-national state to which the traditional laws supposedly do not apply.
The Tax Authority and Google declined to comment on the report. No response had been received from Facebook as of web posting.
Published by Globes [online], Israel Business News - www.globes-online.com - on March 21, 2017
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