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 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 instability is prompting companies to take a wait-and-see attitude toward Israel. Says Shlomo Kalish, president of Jerusalem Global Consultants Ltd., a local investment bank: "Foreign companies are going to start asking whether they need this kind of headache."
With Murdoch the target, the affair has 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 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.
News Datacom has become one of Israel's high-tech stars. With 250 employees, it is a leading global provider of technology for pay-TV access systems. The technology was developed by mathematician Adi Shamir, an expert in encryption and coding at the Weizmann Institute of Science in Rehovoth.
For its part, News Corp. denies any wrongdoing and alleges that a disgruntled former employee, now facing a lawsuit filed by News Corp. in Britain, was behind the investigation. 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," a statement issued by News Corp. said.
TAX RAP. At the center of the dispute is how much income Murdoch's R&D operations should be reporting inside Israel. News Datacom exports decoders and other software to News Corp. affiliates around the world. The tax inspectors also are looking into whether senior managers were paid consulting fees abroad, in addition to regular salaries. Such fees could be a way to evade Israel's 50% personal income tax rate. The corporate tax rate in Israel is 35%.
News Corp. maintains that its unit "reports its taxes in the same manner as hundreds of other" R&D 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 impact of the tax authority's tough stance. With the peace process floundering and the need for investment as high as ever, Netanyahu may be hoping that his friend Murdoch isn't the type to hold a grudge.