Western Digital to pay $63M in taxes for SanDisk's intellectual property exit from Israel

After a decade-long dispute, Western Digital Israel will pay the Tax Authority approximately $63 million for the removal of the intellectual property of the chip company SanDisk from Israel. This decision came after it was found that the company artificially reduced the amount it claimed it had to pay through a transaction with a related international company registered in Texas. Tel Aviv District Court Judge Harry Kirsh ruled on this following tax appeals filed by the company.

The ruling effectively almost doubles the amount of tax (46%) that Western Digital will pay to the state coffers—from $35 million to about $63 million. However, the assessment by the judge is 78% lower than the amount demanded by the Tax Authority, which was $136 million. The judge noted that his calculation is theoretical and subject to various updates, such as the amount of interest on an internal loan between the companies that was also at the center of the appeal.

SanDisk, one of the largest and leading companies in Israel in the previous decade in the field of flash memories, was acquired by Western Digital, which is traded on Nasdaq in the U.S., for $19 billion in 2016. However, according to Kirsh's ruling, about two years before the transaction, which changed the company’s name to Western Digital Israel, an internal transaction was carried out at SanDisk. As part of the transaction, SanDisk Israel sold its intellectual property—that is, patents, the brand, reputation, etc.—in an internal transaction to SanDisk Technologies, which was registered in Texas, USA.

SanDisk initially set a price tag of $35 million for this internal transaction in an independent tax assessment. However, the Tax Authority disagreed, determining that due to the special relationship between the parties to the transaction—SanDisk Israel and SanDisk Technologies in the U.S., both part of the same multinational group—SanDisk (now known as Western Digital Israel) should be taxed as if it were entitled to receive $136 million, representing the value of the tax on the removal of intellectual property from Israel.

The calculation of this amount resulted, among other things, from the question of what capital gain was created for the company. The judge discussed in detail the arguments of both parties in the verdict. For example, the Tax Authority tried to support its assessment by referencing the fact that the Israeli company Anobit Technologies Ltd. was purchased by the Apple Group in December 2011 for $390 million.