A history was made over the weekend when 136 countries agreed on a rare reform, according to which the tax on the profits of the technology and pharmaceutical giants would be distributed more fairly. Instead of tax drills nicknamed “The Double Irish” or “Dutch Sandwich” – drills taken by technology giants to transfer their profits from European countries to tax havens in the Caribbean and the Americas – the tax will now be paid proportionally according to sales volume in the target countries.
Meaning: Israel will also be able to bring in tens of shekels from the profits of Facebook, Google, Amazon, and even Netflix in the country.
The agreement reached by all parties includes two clauses. The first deals with the target markets and not only with the location of the headquarters or intellectual property, and is therefore very relevant to Israel. It only targets companies with an annual turnover of over $ 23 billion and a profitability rate of more than 10% and therefore focuses on about 100 giant companies, most of them technology companies such as Facebook, Apple, Amazon, Google, Microsoft, Johnson & Johnson and Pfizer. .
The second section deals with the tax on corporate profits in each country, which will now be compared to a maximum of 15%, but will focus on companies with annual revenues of just over $ 866 million. Companies below this threshold will be able to continue to pay the corporation tax customary in each country. Unlike the first clause, the corporation tax clause is only a recommendation and does not oblige countries like Switzerland, Ireland or Israel to raise its corporate tax rate on international companies. On the other hand, profitable Israeli companies such as Checkpoint or Nice will be forced to part with low tax rates that they were used to, and on the other hand will no longer be able to “threaten” to flee to countries with lower tax rates.
The American interest that led to the global agreement Interpretation
The turning point in the global race to the bottom of tax rates – the global competition to attract multinational corporations by lowering corporate taxes – occurred with the election of Joe Biden to the White House about a year ago. The Democratic president has announced that he intends to dramatically raise U.S. corporate taxes (from 21 percent to 28 percent), which has created a U.S. interest in preventing giant corporations from fleeing U.S. states with lower tax rates, as has happened in the past. This interest meets with European determination to test the American technology giants, and the result is the global corporate tax agreement between 136 countries announced over the weekend under the OECD umbrella.
The Americans offered Europe and the entire world a “carrot” in the form of a first.of.its.kind agreement to test the technology giants according to the actual location of their revenues. It was the move the U.S. had taken in the past because of a trade war and imposed tariffs on it. In return, the Americans received a global agreement on a 15% tax for large companies, which are the “immediate suspects” for moving between countries for tax reasons.
But along the way the reform has gone through many compromises have been made. In July, for example, G.20 leaders announced that corporate tax would be “at least 15%.” In the latest OECD announcement over the weekend, however, the word “at least” was omitted and was set to stand at 15%. Ireland, according to reports, where corporation tax stands at 12.5%, was the one that demanded the amendment. Hungary, another European opponent, has managed to exclude investment in car factories from the reform, and China has worried that the reform regarding the taxation of technology giants will not initially apply to its large and new companies. Banks and financial institutions are also exempt from the restrictions of the reform, a step demanded by Britain.
In total, the OECD estimates, the reform will result in an additional $ 150 billion in tax collection per year, and will redistribute tax collection of similar value among the countries. This is a small amount in relation to the global revenues of the large multinational companies. Ireland, for example, is expected to lose around € 2 billion in tax revenue due to taxation in other countries, but also to gain around € 2 billion due to raising the tax rate to 15%.
In addition, big tech companies like Facebook, Google, Amazon and Apple have won a freeze on additional taxes that countries like France have already imposed (and temporarily suspended), and a general intention to abolish taxation by a country in the name of global agreement. They prioritize the certainty of a global agreement over dealing with legislation at the various countries.
The agreement is not yet valid, and each of the 136 signatory states must ratify it. The toughest battle will be in the US, in part because it is estimated that it will require the signing of a treaty that requires a large majority in the House of Representatives. Most Republican representatives oppose the reform. .
An additional $ 150 billion from taxation
The most dramatic change concerning Israel under the new regulation deals with the way in which profits are divided over the revenues of international giants in the world: Facebook, Google, Amazon, Microsoft Apple, Pfizer and a hundred other companies that meet a high revenue threshold of at least $ 23 billion a year, and at a rate EBITDA profitability of over 10%.
Currently, companies such as Facebook, Google or Apple do not pay tax in Israel on their sales activity. Facebook, for example, does not pay VAT to the state on the sale of advertising space and Amazon does not pay VAT on the sale of cloud services in Israel. This is because Facebook and Amazon refer to Israel as a local sales area, with the relevant intellectual property and headquarters and operations activities located in Ireland or the US.
The tax they pay in Israel is derived solely from the employment of employees and not a calculation of the actual sales turnover. So if sales have increased or profits have increased, the Israeli tax authority cannot know this. Under the new rules, the profits of companies will be carefully scrutinized by local tax authorities. International companies will be forced to report the relative share of each country in the total of its revenues and profits even if in a non.public manner. If, for example, Facebook’s EBITDA profit last year was $ 30 billion, from now on it will have to divide the amount into different countries according to the relative share of their activity.
Although Israel is a small country of about 9 million inhabitants, in this sense its seemingly smaller share is considered smaller than that of France, which has a population of 67 million. But the Israeli advertiser market is much larger than Israel’s relative share of the pie of Facebook users. In other words, the advertising budgets of Israeli giants such as Iron Source, Wix, Playtica, 888 and Monday give Israel a special status in the sales departments of advertising.based companies such as Google and Facebook or cloud computing companies, such as Amazon AWS. That is why Israel is expected to collect millions of dollars in taxes directly from the Internet giants, which it did not receive before.
However, the tax that will be collected will be calculated in a complicated way, one that also greatly reduces the tax received in the end: the Israeli corporation tax will apply to only 25% of the profit that will be over a tenth of the income. That is, a company with revenues of $ 100 million, and with a profit of $ 11 million will pay tax on a quarter of the remaining percentage, meaning a quarter of a million dollars. In the example before us, the Israeli corporation tax, which stands at 23%, will be levied on only $ 250,000.
Dr. Michael Bricker, a tax partner at Meitar, notes that in addition to redistributing the tax on profits, this plan is also pioneering in the fact that it plans to set up a unit that will oversee and avoid double taxation on the part of companies, and also outline an international standard for how profits are calculated for marketing. And sales. Such a change may have an impact on the way in which sales offices of giants such as Facebook, Google, Amazon and Pfizer are taxed in Israel.
Dina Paragraph / Photo: Roni Pearl
Advocate Guy Ofir, who has conducted a number of legal proceedings regarding the enforcement of VAT and higher corporate tax on Facebook and other international companies operating in Israel, believes that even after the reform, most of the corporations’ profits will continue to flow to them. “The reform does not include VAT on sales of international companies whose profits continue to flow to Ireland and tax havens around the world.”
New Tax Plans: What They Will Look Like
Now that 136 countries have signed an agreement to levy corporation tax at a similar rate and redistribute the tax on profits from Internet giants, will there be loopholes that will allow tax planners to continue allocating profits to other countries to reduce their tax payments? Tax islands such as Cyprus or Malta have expressed some opposition to the legislation, but since they belong to the European Union they are likely to apply the new rules to themselves.
Active tax havens in the Caribbean, such as the Cayman Islands, the British Virgin Islands or the Guernsey Island in the Menashe Canal could theoretically continue to function as tax havens, but under the new agreement companies whose management is located in countries that are not signatories to the agreement are subject to sanctions. For example, non.recognition of their expenditure for tax purposes in the signatory states.
Transactions between companies in signed countries and countries located in “rebellious” countries may also not be recognized for tax purposes. This cost, the drafters of the agreement hope, will put pressure on companies to settle in the countries that signed the agreement, and hopefully these will also put pressure on statesmen to sign the treaty eventually.
Dr. Michael Bricker / Photo: Tomer Jacobson
Fear: Israel will lose attractiveness
The corporation tax in Israel is 23%, but most of the large technology companies active in the country enjoy exorbitant tax benefits that encourage them, so to speak, to employ development workers and produce intellectual property in Israel, or even produce products in the factory. Thus, Intel enjoys a corporate tax of 16% on its development activities and 7.5% on the production plant in Kiryat Gat. Checkpoint enjoys a 12% tax rate, although its headquarters in Israel, and foreign giants such as Microsoft, Facebook and other international companies that own and develop intellectual property in Israel, are estimated to pay only about 6% corporate tax.
“Israel, or even any country in fact, is not obligated under the new convention to raise the corporate tax to 15% for subsidiaries of foreign corporations, but it is in its interest to rake in more tax,” Dina Paska.Raz, partner and head of the technology and system division, told Globes International taxation in Somekh Chaikin KPMG. “If it chooses not to raise the tax, a U.S. where the executives of most global Internet companies are located, it could ask for the difference on the unpaid tax in the country so that it will profit for itself and in our place. This is different in large Israeli corporations with local headquarters that are subject to a tax rate of less than 15%. “Israel will have to compare the global tax rate against them.”
Between the tax authority and some of the Internet giants, rumors have begun about reaching a possible agreement that the authority will reduce the tax on dividends while raising the corporation tax, in order not to create a total tax rate of over 15%. Some companies have already signaled to the Authority that an immediate increase in corporate tax from the current 6% to 15%, and another dividend tax, may be heavy for them.
Even after the new agreement, Ireland is challenging the Israeli economy. Its favorable tax policy, which imposes a corporate tax of only 12.5% and the high concentration of talented workers, has brought its high.tech economy to a record volume of 500,000 employees – close to 1.5 times more than the volume of the Israeli high.tech industry. “Despite the new international agreement, international companies will not abandon Ireland so quickly in favor of Israel,” says a senior lawyer who is well acquainted with the high.tech industry in Ireland. “The Irish did an orderly job before signing the international treaty. They appealed to many multinational corporations and worked well with governments. The Israeli tax authority, on the other hand, is not seen in these places. Israel needs to rethink its position in the new world of incentives. There will be no planning here. “