Are lower taxes still too high?
Firms seeking tax shelter will still look outside Israel.

The multi-year economic plan that the Ministry of Finance has conceived does reduce the heavy tax burden but it is insufficient and it does not amount to a solution for Israeli entrepreneurs, who will continue to move corporations and businesses to other countries.

Last week, Minister of Finance Ronnie Bar-On announced at the press conference he held that the tax reform he was proposing "would make the Israeli economy more attractive, provide an incentive for work and investment, and eliminate distortions in the tax base." Once the tax reduction plan goes into effect, he added, Israel could have an advantage over economies in the West as early as next year.

But will it?
Company tax is due to fall to 24% in 2010, and the Finance Ministry is now proposing that that it should be gradually lowered to 20% by 2015. Lowering company tax in Israel to 20% is good, but even if it is approved and implemented, there will remain a substantial gap compared with other countries. In addition, if the business sector is now expected to wait until 2015 for the tax break to take effect in full, many businesses will no longer be here by then.

Yet even if it is applied, at 20% Israeli company tax is still high compared with Cyprus where the tax rate is 10%, Ireland where it is 12.5%, and other countries where the tax rate is zero, such as those countries known as tax shelters. With a discrepancy in tax rates between countries as dramatic as this, individuals and businesses have a clear incentive to move to those countries with low tax rates.

At present, Israelis hold thousands of foreign companies in various countries across the world, and I expect this trend to continue and intensify further. Other countries have been far more proactive than Israel in their efforts to bring tax rates down and attract foreign investors.

Instead of an incremental reduction in tax rates, the government should take a strategic decision to institute a drastic cut in the tax burden, with the aim of making Israel an attractive location for Israeli entrepreneurs and foreign investors. In the meantime, until that happens, companies and taxpayers will continue to use complicated tax planning methods, including international tax arrangements, in order to lower their tax burden.

The writer is an attorney specializing in Israeli international tax law at law firm Eitan Mehulal Law Group, and a lecturer in law at the College of Management Law School. The author can be reached at: avin@em-lg.com 

Published by Globes, Israel business news - www.globes-online.com - on June 15, 2008