Israel's Finance Ministry Recommends Against AI Tax

Israel's Ministry of Finance has recommended against imposing a special tax on artificial intelligence (AI), according to a report by Ynet on Tuesday, September 29. Minister of Finance Bezalel Smotrich had tasked ministry specialists with studying the tax implications of AI's rapid development and integration into the labor market and other sectors. The preliminary recommendations, presented to Smotrich, suggest adapting the tax system to the AI era without specific AI levies.

The report, led by Chief Economist Dr. Shmuel Abramzon, involved discussions with government bodies and the public. A key conclusion is to avoid special AI taxes. Instead, the ministry proposes enhancing tax rule certainty, favoring taxes not tied to labor income, making Israel more attractive for company registration and operations, and adapting the system to prevent profit shifting abroad in coordination with international efforts.

The authors analyzed scenarios of AI's economic impact, highlighting significant uncertainty. They identified three main factors that could reduce tax revenues: a shrinking tax base from labor income due to job displacement, wage stagnation, and the replacement of local workers with foreign digital services; the relocation of high-tech company profits overseas, particularly to countries with advanced AI infrastructure like the U.S.; and challenges in maintaining competitiveness and productivity growth.

The recommendations emphasize that the harm from a special tax on robots, AI agents, or computing power would likely outweigh any benefits, potentially hindering economic and technological development and stifling Israeli companies in the sector. The ministry advocates for maintaining competitive global tax levels, ensuring a favorable business environment, access to quality infrastructure, and a skilled workforce.

To offset potential reductions in the tax base, the specialists suggest increasing taxes not linked to labor income, such as on undeveloped land, incentivizing the distribution of accumulated company profits, and taxing consumption. Regarding international operations, the report urges making Israel more appealing for company registration and operations while preventing profit expatriation through enhanced tax control and participation in international initiatives. The group will continue its work, with updated findings expected in the coming months.