It was Israel's biggest-ever tax raid: On Oct. 20, dozens of tax inspectors descended on the offices of a Jerusalem-based unit of News Corp., the media giant controlled by Rupert Murdoch. Grabbing files and computers, they were gathering evidence for an investigation into the subsidiary, News Datacom Research Ltd., for allegedly hiding $150 million in income earned by selling its sophisticated technology for decoding satellite television transmissions around the world. The inspectors went on to seize evidence from the company's lawyers and accountants.
The high-profile raid pits Israel's tax collectors against Murdoch, who considers himself a big backer of the country's growing high-technology industry. Indeed, Israeli industry observers fear that such a hard-line approach from the tax police could drive much needed foreign investment away at a time when political instability is already prompting companies to take a wait-and-see attitude toward Israel. Says Shlomo Kalish, president of Jerusalem Global Consultants Ltd., a leading local high-tech investment bank: "Foreign companies are going to start asking whether they need this kind of headache."
With Murdoch the target, the affair has quickly taken a political twist. Israeli Prime Minister Benjamin Netanyahu, a friend of Murdoch's who is keen on maintaining business confidence, seems to be backing the media magnate over his own bureaucrats. Netanyahu's senior media adviser, David Bar-Ilan, terms the allegations against Murdoch's company "outright libel" and has criticized the tax authorities for a lack of discretion.
SOUR GRAPES. News Datacom Research has become one of Israel's high-tech stars. Since Murdoch opened the unit in 1988, he has invested close to $40 million in building up the R&D center. Now, with 250 employees, it is a leading global provider of technology for pay-television access systems, which are used by 6 million customers around the world. The technology was developed by mathematician Adi Shamir, a leading expert in encryption and coding at the Weizmann Institute of Science in Rehovoth. News Corp. says that all the research has been privately financed and that it has not applied for any government research contracts that restrict the use of technology or its export.
For its part, News Corp. denies any wrongdoing and alleges that a disgruntled former employee was behind the investigation. The company says that it has filed a lawsuit against the employee, former head of the Jerusalem unit, in Britain. The employee "has been attempting to extort News Corp. to drop its legal action and has threatened to cause trouble with Israeli tax authorities for over a year. News Corp. has made it clear that it has nothing to hide," a statement issued by the company said.
HAWK EYES. At the center of the dispute is how much income Murdoch's R&D operations should be reporting inside Israel. News Datacom Research exports decoders and other software to News Corp. affiliates around the world. The tax inspectors are also looking into whether senior managers were paid consulting fees abroad, in addition to their regular salaries. Such fees could be a way to evade Israel's 50% personal income tax rate. The corporate income tax rate in Israel is 35%.
News Corp. maintains that its unit "reports its taxes in the same manner as hundreds of other" research and development units of international companies in Israel. Neither the Israeli unit nor its British parent, News Datacom Ltd., reported operating profits prior to the fiscal year ending June 30, 1996, the company says.
As Israeli officials sift through the evidence they recently seized from Murdoch's unit, local companies will be worrying about the potential negative impact of the tax authority's hawk-like stance. With the peace process still floundering and the need for foreign investment as high as ever, Netanyahu may also be hoping that his friend Murdoch isn't the type to hold a grudge.