Israel Tries to Lure Giant Tech Companies With Incentives

  • Large companies to pay as little as 6% corporate tax
  • Proposed changes to be included in Israel’s 2017-2018 budget

Bloomberg) --Israel is planning new benefits for technology companies as it seeks to maintain its position as a global hub for innovation.

Finance Minister Moshe Kahlon wants to cut corporate taxes for companies that conduct research and development in Israel and register intellectual property there, according to a ministry official who spoke on customary condition of anonymity. Taxes would drop to as little as 6 percent from the current range of 16 percent to 25 percent, with top benefits going to companies with more than 10 billion shekels ($2.59 billion) in annual global sales.

Shareholders would pay a dividend tax of just 4 percent, down from as much as 20 percent, the official said.

The changes, which are to be included in the 2017-2018 budget, signal new priorities for Israel as it competes with countries such as Ireland that have lured multinationals with deep tax cuts. They’ve been proposed partly in response to efforts by the Organization for Economic Cooperation and Development to clamp down on tax havens by forcing tech companies to register patents -- and therefore pay taxes -- in the countries where they are developed, the official said.

Economy Shift

Israel’s focus on innovation underscores an ongoing shift to knowledge-oriented industries from low-tech manufacturing, which has suffered in recent years due to the strong shekel and rising labor costs.

“Kahlon has highlighted two major goals to stimulate growth: boosting investment and cutting taxes,” said the chief economist of Meitav Dash Investments Ltd., Alex Zabezhinsky. “With this move, he accomplishes both. There is a clear understanding that the key now is to attract more investment in the high-tech sector, and this fits with that idea.”

Israel is under pressure to energize its high-tech economy as overall economic growth slows on sinking exports to just above 1 percent and capital investment stagnates. Economists have expressed concern that the country isn’t doing enough to attract talent and that its technology sector, a source of national pride and economic momentum, is stalling.

Cutting taxes won’t solve a key problem for the sector: a lack of skilled labor, which is bidding up salaries of computer scientists and software developers. Finance Ministry officials, including chief economist Yoel Naveh, have proposed that the country solve such shortages by importing people with these skills and encouraging students to study math and science. The idea of bringing in foreign workers has made little headway in a country where any sign of diluting a Jewish majority is politically explosive.

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