Giant Internet corporations such as Google and Facebook will have to pay taxes in Israel, the Israel Tax Authority announced in a statement Monday. The business community responded in negative tones to the announcement, while some consumer and good government groups expressed their enthusiastic support for the move.
The new rules determine in which cases a foreign Internet corporation operating in Israel may be viewed as a “permanent institution” and therefore be made to pay income tax and VAT in Israel. Generally, these are companies which own physical locations in Israel. However, even an agent with the power to sign contracts for a corporation which otherwise may be located elsewhere on the planet is considered a “permanent institution” of said corporation.
According to the ITA, starting now, foreign corporations, including those in the technology sector, with “substantial business activities” in Israel will have to register as licensed business in Israel and collect VAT from its local customers. Likewise, corporations such as Amazon, who don’t set foot in Israel, but whose websites sell goods to Israelis living in the Jewish State, will also be compelled to register and collect VAT for the ITA.
The ITA said that “the expansion of the economic activity executed via the Internet requires applying the existing rules in ways that would match the changes in economic activity and apply the principles of taxation to the digital economy as well.” What it means in reality is that the time for freeloading is over, and folks who own virtual rather than real stores on the boulevard must share in the tax burden.
MK Yoav Kisch (Likud), who in the past initiated a bill to compel multinational corporations to pay taxes in Israel, was nevertheless not happy with the ITA’s new rules. In his view, in its effort to avoid initiating new legislation, the agency opted for a new interpretation of the tax law, which may prove to be hazardous. “The interpretation might cause these companies to close their local shops to avoid paying the taxes,” Kisch said.
Kisch told the website PC.co.il that his own bill, to be submitted during the summer session of the Knesset, will divide between global and local Internet products, and tax only the latter.
Erez Tzur, co-CEO of the Israeli Association for Advanced Industries (IATI) warned that the Israeli hi-tech industry is already at a disadvantage when competing for investments against startups abroad, considering Israel’s reputation for security, political and regulatory uncertainty, the strong shekel and the high cost of hiring quality Israeli engineers. “Increasing the taxation,” as announced by the ITA Monday, said Tzur, “hurts even more the ability of the Israeli hi-tech industry to compete around the world and makes it more difficult to expand the multinational technology companies’ activities in Israel.”
“We shouldn’t slaughter the chicken that lays golden eggs to enjoy its meat and plume,” Tzur cautioned.
Which goes to show that Israelis, even the local technology magnates, are a humble bunch. Most people would use a goose for the above metaphor.