New Israeli tax guidelines target Google, Facebook

New Israeli tax guidelines target Google, Facebook

The Israel Tax Authority on Monday released a circular explaining how it would tax foreign digital companies–such as Google and Facebook–who do business in Israel.

The circular said that companies that are not based in Israel can be subject to tax on revenues if they offer their services to Israelis via the Internet. Previous taxation laws, which were written before Internet commerce became so significant, only levied such taxes on companies that had production facilities in Israel.

If the companies were based in countries with which Israel had a tax treaty, it would only be taxed if it were considered a “permanent establishment” here, defined as the enterprise or its agent having a physical, permanent location for carrying out its business.

The Authority also said such companies doing significant business in Israel would have to register with the the Value Added Tax division.

Because Internet-based companies can rack up significant sales without having a physical sales office, however, the Tax Authority is seeking a new approach.

For example, according to S. Horowitz & Co partner Leor Nouman, Facebook and Google may sell millions of shekels worth of ads to Israelis, and Netflix may sell subscriptions, regardless of whether they are thought to have permanent establishments in Israel (research and development centers may not count because they are not sales oriented). Until now, such revenues would not have been taxed.

The Finance Ministry thinks it can reap significant revenues from such a policy, which Likud MK Yoav Kisch has been promoting through legislative efforts.

But Kisch, who went as far as floating a blimp emblazoned with the words “Google Must Pay Tax” outside Google’s Israel offices last week, came out against the circular.

“The Tax Authority has chosen the wrong track. The method of ‘permanent establishment’ as a test point may cause the closure of local branches of those companies,” he said. His bill, he added, would distinguish between local and global Internet products.

Erez Tzur, the chairman of the Israeli high-tech umbrella group IATI, also called for a “responsible tax policy” that wouldn’t “damage one of the important growth engines in Israel.”

Already, he argued, Israel had a tough time competing for high-tech investment with other countries.

“The tax increase in the tax authority circular further harms the ability of Israeli high-tech to compete globally, and adds burden to the multi-national companies in Israel,” Tzur said. “Do we have to kill the hen that lays golden eggs so we can enjoy its meat and feathers?” he added.

Representatives from Google, Ebay, PayPal, and Facebook all declined to comment.

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