Dollar Weakness: Treasury Expects a Near-Term Aid Package for the High-Tech Sector

The Ministry of Finance estimates that within a short time, an aid package will be formulated and announced for the high-tech sector in response to the rapid strengthening of the shekel. The main form of assistance is expected to come through Innovation Authority grants that high-tech companies will be able to receive. The plan is expected to be based on previous frameworks created by the Innovation Authority during the coronavirus crisis, totaling about NIS 400 million, and around the outbreak of the Iron Swords war, totaling about NIS 100 million. In those previous cases, the Innovation Authority allowed struggling startups, for example those with less than six months of cash flow, to apply for a grant, provided that the company had investment in R&D and a good chance of surviving the current crisis. It should be noted that Innovation Authority funds are a "conditional grant," meaning that if the company succeeds in developing and making money, the funds are returned to the Authority.

The turmoil in foreign exchange is also reaching lawyers: "With the dollar exchange rate, you lose two to three months of life." The sharp drop in the dollar is also affecting law firms that support the high-tech industry and foreign investment. Senior partners at large firms who spoke with Calcalist say they are seeing tens of percent erosion in dollar revenues, efforts to update fees, and concern over uncertainty. Amir Korts, full article.

While in previous crises aid focused only on startups with cash-flow problems, the Treasury is seriously examining, together with the Innovation Authority, providing grants also to multinational high-tech companies, with the aim of preventing companies from rushing to move production lines and centers from Israel to other countries. These grants require more complex thinking, since grants to established and wealthy companies are unlikely to be given without the state demanding something in return. The Treasury is now working on formulating those requirements. Officials there fear a scenario in which they would ask companies to commit not to lay off employees, which could actually make it harder for the companies to become more efficient.

The Treasury says that in recent weeks it has met with many players in the local high-tech industry, and along the way has learned of many challenges facing the industry in Israel. The main challenges are, of course, the penetration of artificial intelligence and the strong shekel. In discussions with people from the high-tech industry, some Treasury officials have been convinced that there are tax challenges in the high-tech world in general, and in the world of artificial intelligence in particular. However, at this stage the impression is that this is a general conclusion, and it is not clear what tax breaks the Treasury intends to give the high-tech sector. Tax Authority Director Shai Aharonovich said at the Eli Hurvitz Conference that "we will need to reexamine the implications of taxing retained earnings," a tax that has concerned many players in high-tech. Tax benefits were also granted to the high-tech sector last year.

The Ministry of Finance is careful to stress that it will not try to influence the exchange rate, and that it is leaving all foreign-exchange trading to the Bank of Israel, which is responsible for the issue by law. The ministry also makes an effort to emphasize that it understands the strengthening of the shekel is a long-term process, and that the assistance it is providing now is only for the interim period, while in the long term export businesses are expected to adapt to the exchange rate determined in the free market.

Finally, it sometimes seems that officials at the Ministry of Finance are more enthusiastic and more worried about the effect of the exchange rate on high-tech than on traditional exporters, even though exporters in the traditional industry face a very difficult challenge, since their profit margins were lower to begin with. However, senior Treasury officials told Calcalist that they are also holding meetings with representatives of the traditional industry, and there too they intend to formulate a plan to help traditional companies improve efficiency and productivity so they can cope with the strong shekel.