Israeli Government Divided On Required Response to U.S. Tax Reform

The U.S. tax reform is dividing Israel's financial leadership. After months of debates, no consensus has been reached concerning the steps required to maintain the local market’s attractiveness for businesses and investors in the face of corporate tax reductions in the U.S.

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Approved in December 2017, the reform spearheaded by U.S. President Donald Trump constitutes a major overhaul of the federal tax system. Among the changes are the lowering of the U.S. corporate tax rate lowered from 35% to 21%, and a new tax levied on cross-border payments and other modified taxable income of American corporations with average annual gross receipts of $500 million or more.

The reform stirred the Israeli government, as the country is home to hundreds of foreign entities operating local research and development centers, and is dependent on an influx of foreign investments. The new tax regime could also tempt new Israeli companies to set up shop in the U.S. instead of in Israel. In January, Israeli Prime Minister Benjamin Netanyahu formed a team to look into the possible impact of the U.S. reform on Israel’s economy and devise recommendations. Headed by Avi Simhon, chairman of Israel’s National Economic Council, the team is one of four entities tackling the issue, other teams operating under the Israeli Ministry of Economy, under Israel’s central bank, and under the Israeli Finance Ministry and the Israeli Tax Authority.

Last week, Israel’s Minister of Economy Eli Cohen addressed a letter to the country’s tax authority, seeking to grant local tech firms tax benefits, including accelerated depreciation, according to several people familiar with the matter who spoke on condition of anonymity. The notion of accelerated depreciation was first floated several months ago by the manufacturers association of Israel, only to be shot down by the finance ministry citing budgetary deficit.

The ministry of finance is also against the idea of other tech tax benefits, according to the people familiar with the matter.

As of yet, the U.S. reform did not impact the Israeli industry, and at this point the situation should be monitored but not acted upon, according to the Israeli Ministry of Finance.

A report published earlier this month by the ministry's chief economist stated that Israel is well positioned for a reevaluation of its policy regarding foreign investors and investments, but that changes should touch on administrative and political advancements, including making changes to existing tax treaties or signing new ones.

"Opening the Israeli market to foreign investors in additional sectors will enable (Israel) to leverage the advantages of foreign investments in domains where they are needed, increasing productivity, reducing the cost of living, and boosting the market's economy," according to the report.

In its last report concerning the Israeli economy, the Bank of Israel made similar assertions against tax reductions. The country’s central bank and finance ministry oppose changes to an Israeli law encouraging capital investments that would see companies that export at least a quarter of their product receive local tax benefits amounting to around NIS 7 billion in 2018.

Israel’s central bank is of the opinion that significant amendments to the law are needed. The bank advocates for similar benefits to the local industry. Mr. Simhon, in contrast, supports changes to the foreign capital investment law and tax reductions.

"You can't ignore Trump's tax reform," he told Calcalist in an interview Sunday. "It's a dramatic action that could significantly impact the Israeli economy, and we need to be ready for it."