Israel to collect a minimum tax rate of 15% from multinational companies
Israel to collect a minimum tax rate of 15% from multinational companies
The Ministry of Finance announced that Israel would join the OECD's taxation plan on multinational companies with the policy expected to enter into force in 2026. Amid concerns that raising taxes may reduce Israel's attractiveness for companies, the ministry says that they can still receive special grants.
Israel’s Ministry of Finance announced that it will tax multinational corporations operating in Israel at least 15% tax on their profits. The Ministry is aiming to complete the legislation by 2026. This initiative has been promoted by the OECD for over a decade. The broad initiative, known as BEPS (Base Erosion and Profit Shifting), aims to prevent the erosion of the tax base of multinational companies.
Many of these companies have taken advantage of the desire to attract large multinational companies by reducing their tax rates. Another goal of the initiative is to prevent profit shifting from one country to another. The extensive BEPS project has identified fifteen areas for action, ranging from addressing "the tax challenges of the digital economy" and "tools to supervise tax treaties between countries" to "transfer pricing" and "addressing tax erosion through reduction of financing expenses and other financial payments."
Israel, along with about 140 other countries, has been participating in BEPS discussions since the project's inception. In 2021, the Ministry of Finance announced its intention to join this framework and strive for a minimum international tax of 15%, but this announcement was just the beginning, as it took a considerable amount of time for the central pillars of the project to be formulated.
About a year ago, the Ministry of Finance announced it was adopting Pillar 1 of the project, which aims to collect a certain amount of tax from multinational companies with income above €20 billion ($21.6 billion), to be transferred to the countries where the profit was generated. For example, this measure would require Netflix to pay part of its tax to Israel, as it profits from residents using its services here.
This week, the Ministry of Finance announced its intention to adopt Pillar 2 of the project, under which Israel commits to collecting at least 15% tax from multinational companies. The main idea of Pillar 2 is that large multinational companies with annual revenues over €750 million ($812 million) will be required to pay at least 15% tax on the corporation's total profits.
For example, if a company is in five countries, all of which are signatories to the agreement. In the first stage, these countries can collect 15% of the profits attributed to the company in that country. If one country fails to collect 15%, the other countries can collect the difference between the tax paid and 15%. For example, if Israel only collected 5% from Intel, Ireland (if it is part of the agreement) could collect the remaining 10%.
Even if Israel weren’t to implement a tax regime, if other countries do, Israel won’t necessarily benefit from offering reduced tax rates, as any multinational company operating here would still need to pay a 15% tax rate in another country. However, the implications of international minimum taxes could affect Israel in a unique way.
Firstly, Israel already has a law to encourage capital investments through low tax rates and grants to many companies, including multinational ones. The Ministry of Finance has clarified that if the minimum tax is less than 15%, there might be other ways to maintain Israel's attractiveness, such as grants or other bypass methods.
Secondly, Israel hasn’t adopted the entirety of Pillar 2. It accepted the principle of collecting a minimum 15% tax but has yet to sign the part allowing sister or subsidiary companies to collect the 15%, as it isn’t certain whether such a move would serve its interests. Alongside Israel, Switzerland has not signed this part either, the U.S. has not yet fully joined the agreement, China is still deliberating, while Japan already began implementing the agreement in 2024.
Thirdly, there is a long time until these measures take effect in Israel. If countries worldwide have already legislated Pillar 1 and Pillar 2 for 2024, Israel intends for the legislation to take effect only in 2026. However, there is still much work to do along the way. The law needs to be written, adapted to Israel, and then passed in the Knesset.
The Chief Economist at the Ministry of Finance, Dr. Shmuel Abramzon, who leads the OECD discussions on the matter, told Calcalist that "the goal is not to increase revenues, but to create certainty for multinational companies operating in Israel." He emphasized that even after the tax structure changes, "Israel will work to maintain its attractiveness and prevent revenue leakage abroad."
