Photographer: Thomas Coex/AFP via Getty Images

Tax Breaks Are Israel’s Bait to Lure Multinational Companies

  • New tax regime meant to boost Israel’s slowing tech industry
  • Red tape continues to weigh down on business environment

Israel is determined to turn an OECD-led corporate tax crackdown to its advantage.

With its prized tech industry slowing, officials are headed to the U.S., Europe and Asia to offer tax breaks to global technology companies to encourage them to do more research and development in Israel.

“Companies are going to think about where they want to relocate or if they want to relocate, and I want Israel to be on the map,” said Economy Ministry director-general Amit Lang, who will be pitching Israel to tech giants in east coast cities this week and next. After his U.S. road show, he plans to promote the plan in Europe and Asia as well.

A plan proposed by the Organization for Economic Cooperation and Development would stop multinationals from shifting profits to different countries to lighten tax loads. More than 270 multinationals already have R&D centers in Israel, and Lang’s challenge is to keep them there and add new ones to the roster as countries prepare to implement the OECD proposals.

Worker Shortage

Israel is dangling incentives before international powerhouses as it struggles to redress a staffing shortage in its own technology industry and create a better business environment. Competition will be tough because it’s not the only country cutting taxes to try to lure tech companies. Ireland already offers eligible corporations a tax rate of 6.25 percent, or half the regular tariff.

Israel has cut even deeper in some cases. Corporate taxes have been reduced from 25 percent to 6 percent for technology companies with annual sales exceeding $2.5 billion, and to 12 percent for smaller ones. The government has also slashed the dividend withholding tax to 4 percent from 20 percent.

The provisions are meant to help reverse a trend weighing on Israel’s economy. The technology sector, which accounts for about half of the country’s industrial exports, grew faster than gross domestic product nearly every year between 1998 to 2009. In the following five years, it surpassed it only once, in 2012.

“Today the biggest, richest companies in the world are investing in Israel, but with very little involvement by the government,” said Sharon Shulman, tax managing partner at Ernst & Young Israel. “The government hopes with more involvement, more direction and the right legislation those companies will make significantly higher investments in the Israeli technology sector and take it to the next level.”

Stiff Competition

Orna Berry, corporate vice president for innovation at the Dell EMC Israel Center of Excellence, said the Israeli tax package is competitive, but noted that Ireland and Singapore have created a one-stop-shop for direct foreign investment while in Israel companies still need to hire lawyers to navigate the bureaucracy.

Lang said the current package could be modified.

“If everyone else responds aggressively and we see in two years our position is getting worse, we will consider changes,” he said.

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