Israel Tax Authority Learns From Waze Deal, Seeks New Tax Model for Tech Firms
Translated & summarized from Globes by baba
Israel's Tax Authority is proposing a new tax framework following the $32 billion Waze acquisition by Google, aiming to resolve disputes over intellectual property location. The proposal suggests companies share IP and sales rights with Israel rather than transferring them, potentially avoiding billions in taxes. This aims to prevent the relocation of IP abroad and establish clear tax rules for foreign companies operating Israeli R&D centers.
The story in 6 lines · by baba
- Israel's Tax Authority proposed a new tax framework after the $32 billion Waze acquisition by Google.
- The core issue is determining the location of intellectual property for Israeli tech companies operating abroad.
- The proposal involves sharing IP and sales rights between Israel and foreign parent companies.
- This aims to prevent the transfer of intellectual property out of Israel.
- A 13% cost-plus tax rate is suggested for Israeli development centers operated by foreign firms.
- The new framework seeks to avoid future tax disputes and encourage continued R&D in Israel.
The Israeli Tax Authority is grappling with the implications of the $32 billion acquisition of Waze by Google, a deal expected to generate between 10 and 11 billion shekels in taxes. A key dispute centers on the location of the company's intellectual property (IP). Although Waze is recognized as an Israeli company, it was founded in the U.S., is managed from New York, and its IP is registered there. However, the Tax Authority considers the IP largely an Israeli development, given that most of its cyber engineers and development managers are Israelis employed in Israel, many having served in IDF intelligence units.
In response to such cases, the Tax Authority has proposed a new framework, outlined in an August document, offering concessions for acquisitions of Israeli companies or Israeli companies operating through U.S. parent companies, like Waze or Descartes. Under the proposed arrangement, instead of paying billions in taxes on the transfer of IP from Israel to the U.S., companies would reach an agreement with the Tax Authority to share IP and product sales rights based on a pre-determined accord. This agreement would define the proportional contribution of Israeli and foreign activities to R&D and sales, allowing for cost-sharing.
For historical IP developed in Israel, a joint framework for royalty payments across different territories would be established. Future IP developed post-acquisition would be considered joint IP. This aims to discourage the transfer or initial registration of IP abroad. Additionally, the Tax Authority suggests establishing individual agreements, valid for eight years, to determine corporate tax on the operation of an Israeli development center by a foreign company. The proposed tax rate on theoretical profit (cost-plus) would be 13%, a relatively high rate but open to negotiation, intended to prevent recurring tax disputes.
This contrasts with current practices where tech giants like Meta, Microsoft, and Google benefit from single-digit corporate tax rates on their Israeli development activities, a policy designed to encourage local hiring.
