Facebook, Google Under Scrutiny for Tax in Israel

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By Matthew Kalman

Israel is assessing Alphabet Inc. subsidiary Google and Facebook Inc. on their operations in the country, Tax Authority Director General Moshe Asher told the Knesset parliament Jan. 8.

“The internet giants and other companies right now are undergoing a very significant assessment procedure which in the end will yield from them the taxes due to the state of Israel,” Asher said. He was addressing the Knesset Economic Affairs Committee alongside the head of Israel’s Antitrust Authority during a stormy discussion about the dominance of Facebook and Google in the Israeli advertising market.

The tax authority is pursuing a policy set out in a 2016 circular which laid out guidelines for taxing the commerce of businesses not present in Israel, Asher said. Some foreign companies have already received demands which are being challenged in court, practitioners told Bloomberg Tax in November.

Facebook and Google have come under criticism for not paying taxes in Israel. Since publishing its circular in 2016, the tax authority has made it a priority to levy tax on the profits of digital companies it believes derive from their Israel-based activities. An OECD working group is expected to produce “ambitious, even aggressive” recommendations in April that member countries can adopt legislation in line with the Israeli approach, Asher told the committee.

Important to Invest

Facebook already decided unilaterally to pay tax on its income from local advertising in Israel instead of registering the income in Ireland, its European headquarters, said Jordana Cutler, head of policy and communications for Facebook Israel. “It’s important for us to invest in Israel. The office here is the second R&D center outside the US,” Cutler told the committee.

Most Israeli advertisers on Google wouldn’t have used Israeli media because they want to reach an international audience, Noa Elefant Loffler, Google senior manager for policy and government relations, told the committee.

“We are a law-abiding company,” she said. “Globally, Google pays approximately 20 percent tax, mostly in the US and we follow local and international regulations. If there’s a change following the work of the OECD, the division of taxation will also change. The point of advertising is to give value to both the advertiser and the consumer. Most of what Israeli advertisers do with Google is about targeting international markets and a significant portion is small Israeli advertisers who had no platform before.”

“The company’s activity in Israel is of great value, it is important that it remains in Israel and it is not taken for granted,” she told the committee.

Challenge Expected

Practitioners said the tax authority’s assessments would be challenged, particularly because they were based on a circular and not on legislation.

“It seems that the Israel Tax Authority is determined to implement the circular they have published in respect of digital economy including the ‘substantial digital presence test’ and it has already issued assessments to relevant companies in this respect,” Binyamin Tovi, a partner at Shekel and Co. law firm in Tel Aviv, said in a Jan. 9 email.

Permanent Establishment

Internet companies targeted by the Israeli authorities will dispute how much their Israeli activities contribute to their profits, and also whether Israel has any right to levy taxes based on the location of the market rather than location of the company’s personnel, equipment and data—defined in tax treaties as its “permanent establishment,” said Daniel Paserman, an attorney and CPA and head of tax at Gornitzky & Co. law firm in Tel Aviv, who is representing one such company in court at the moment.

“This is something completely new. The system was always the physical presence,” Paserman said by phone on Jan. 9, adding that Israel was not alone. “The approach is going towards authorities around the world being more aggressive and seeking to amend the laws,” Paserman said. He noted that other jurisdictions, engaged in the same process as Israel, are now starting to implement the OECD’s Base Erosion and Profit Shifting project “at the level of local legislation.”

Warning for Other Companies?

Israel’s decision to target Facebook and Google—rather than, say, Easyjet or Amazon—appears to be linked to the fact that they have offices in Israel to which tax demands can be addressed. That may be a warning to companies like Amazon, now understood to be considering opening a distribution center in Israel.

“The more presence you have in Israel, it will be easier for the Israeli tax authorities to try to attach profit to the physical presence,” said Paserman. “It might be the fact that companies will be deterred from opening centers because this attitude will make their lives more difficult.

On the other hand there is a lot of criticism around these companies, so from a PR perspective they may decide to allocate something to Israel and pay tax in Israel and not be pigs and do nothing. Pigs are slaughtered in the end.”

Google and Facebook didn’t immediately respond to requests for additional comment.

To contact the reporter on this story: Matthew Kalman in Jerusalem at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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