Israel Tax Authority investigating Google and Facebook
Wed 22 Mar 2017
The Israel Tax Authority is currently investigating local outlets of tech giants Google and Facebook, to determine if they have a tax liability in Israel.
Investigators for the Tax Authority have reportedly conducted meetings with clients of Google, asking detailed questions about the methods used by Google and Facebook to conduct local operations.
Questions put to clients centered around the degree of involvement that local representatives of Google and Facebook had in designing marketing campaigns, and setting budgets and targets for clients. The thrust of the investigation appears to be whether the Israeli teams were acting independently, or if they were referring business matters to overseas headquarters and then merely implementing corporate decisions in the local market.
Should the investigation conclude with the determination that Google and Facebook Israel teams are independently responsible for activities in the local market, the tax authority may recommend that the companies pay a tax to the Israeli government for business conducted within the country.
Both Facebook and Google are registered as companies that operate in Ireland, thereby avoiding paying direct or indirect taxes to the Israeli government.
Research shows that total online advertising expenditures topped $333 million USD in Israel in 2015, with online taking an ever-expanding segment of budgets from traditional advertising. Of that $333 million, over half was dedicated to spending on social media and search sites, two areas dominated by Facebook and Google.
While exact figures are unavailable, rough estimates through 2016 are that over $200 million in local digital advertising in Israel goes to Facebook and Google; with Google accounting for approximately $164 million and Facebook owning the remainder.
The current investigation is directly related to last year’s interpretation of Israeli tax law as related to international entities. In April 2016, the Israel Tax Authority unveiled a new set of guidelines regarding tax liability for foreign corporations operating in Israel. Under these rules, an international company would owe taxes if its services were produced in Israel. To prevent double taxation with countries that have international tax agreements with Israel, the foreign corporation must have a permanent establishment within Israel.
A permanent establishment was defined as a physical space used by the business to conduct operations, or a virtual space – including a website – where agents are empowered to conduct local business and enter into contracts on behalf of the corporation.
Local offices for Google and Facebook in Tel Aviv were included on a list of the ‘7 Most Fabulous Offices in Israel’ in 2015.