Multinational corporations represent 'backbone' of Israeli tax revenue

Israel is currently home to 362 active multinational corporations, employing 62,000 workers.

By EYTAN HALON

DECEMBER 31, 2019 10:52

An Intel logo is seen at the company's offices in Petah Tikva, near Tel Aviv October 24, 2011.

(photo credit: NIR ELIAS / REUTERS)

Eager to tap into Israel’s rich pool of innovation know-how and take advantage of attractive government incentives, hundreds of multinational corporations (MNCs) are already active and many are continuing to land in the country.

Israel, recognized globally as a home for ambitious, cutting-edge start-ups, is currently home to 362 active multinational corporations employing 62,000 workers. Hi-tech giants operate local R&D centers, own Israeli hi-tech firms and, in some cases, even boast large manufacturing facilities.

The large presence of multinational corporations also represents the “backbone” of direct taxation in Israel, according to a new report published by industry umbrella group Israel Advanced Technology Industries (IATI), GKH Law and IVC Research Center.

Israel-based multinationals will pay nearly $8.85 billion (NIS 30.6b.) in direct taxation in 2019, the report states, equivalent to approximately 2.6% of estimated Israeli GDP and 18% of annual direct tax income nationwide – estimated to reach $48b. (NIS 166b.). The median tax payment per multinational is expected to be $7.125m. (NIS 24.64m.).

“The large contribution of the multinationals does not only contribute to the hi-tech industry, but to the entire Israeli economy,” IATI chief executive Karin Mayer Rubinstein told The Jerusalem Post, highlighting the contribution of corporate taxes in ensuring economic stability.

“A lot of entrepreneurs who have established start-ups in Israel in recent years have grown out of these multinationals. The companies think globally and act globally. All the organizational culture and professional culture is brought from abroad,” Rubinstein said. “Not many Israeli companies spread their operations across the country like the multinationals, distributing their activity to both the geographical and socioeconomic periphery.”

IATI CEO Karin Mayer Rubinstein (Credit: Sivan Farag)

The report comes amid an ongoing debate about the desirability of growing multinational corporation activity within the Israeli hi-tech industry, with some arguing that profits derived from Israel-based R&D operations primarily return to companies abroad. Israel Innovation Authority CEO Aharon Aharon, a former general manager of Apple in Israel, has warned that inflated salaries offered by multinationals could harm local firms.

Proponents of increased multinational activity often argue that foreign corporates serve as a local launchpad for future entrepreneurs, serve as an example of how to transform start-ups into scale-ups, and can attract citizens living abroad to return to Israel.

Gil Golan, country manager and executive director of General Motors’ Advanced Technical Center in Israel said, “We, Israeli entrepreneurs, are good at developing technologies but we are not that good when it comes to global understanding of pain points and trends. You need to have fully-rounded companies – multinationals bring the global market closer to the Israeli hi-tech.”

“The multinational corporations have a profound impact in multiple ways – firstly, the employees gain vast knowledge that they otherwise could not have access to. Secondly, multinationals bring up-to-date knowledge about what is going on in the world, especially global technical and societal trends,” said Golan, who also sits on the IATI board of directors.

As demonstrated by Israel’s thriving smart mobility innovation sector, Golan believes easing the entry of major automotive corporations has assisted the establishment of the entire ecosystem. The same scenario can be replicated, he added, in other verticals.

According to the report, current direct taxation revenues from multinational corporations could be doubled or even tripled with the implementation of recommendations developed by the OECD and the G20 to tackle mismatches between different countries’ tax systems.

Ayal Shenhav, the head of hi-tech and venture capital practice at GKH, estimates that enterprises are currently paying tax that constitutes approximately 2% to 3% of turnover. Implementing the base erosion and profit shifting (BEPS) recommendations, he believes, could increase taxation to 6% to 12% of turnover, leading to increased state income worth billions of dollars.

While the number of multinational corporations operating in Israel has increased dramatically since 2010, the report identified a slowdown in the latter half of the decade. Between 2010 and 2016, the total of corporations increased by more than 50%, rising from 220 to 354 companies.

Since 2017, 55 multinational corporations have established or increased R&D activities in Israel, including Symantec and Intel, through acquisition of Mobileye. During the same period, 47 corporations ceased to operate in the country, including AVG and Jive Software.

“We have witnessed a decrease in the entry of multinationals because so many have already entered Israel – there has to be a drop,” said Rubinstein. “We cannot ignore the challenges and we don’t want to ignore the challenges. We listen to the things that bother the mature Israeli companies and the multinationals, and go hand-in-hand to find the solutions as soon as possible,” Rubinstein added, highlighting that the IATI board of directors includes representatives from both Israeli and multinational companies.

American technology giant Intel Corp. is the largest multinational employer in Israel, with some 11,000 workers in five different centers across the country. Other leading employers include HP (3,000 employees), IBM (2,000), Cisco (1,600) and Dell (1,500).

While almost half of active multinational corporations (44%) have branches located in central Israel, notably in Tel Aviv and Herzliya, large manufacturing facilities established by Intel and HP in the southern city of Kiryat Gat have developed the Negev region into a hub of multinational activity. The most active foreign buyers in Israel are Google and Microsoft, the report stated, each having acquired seven Israeli companies during the past five years. Intel Capital, the global investment arm of the company, is the most active corporation fund and has concluded 52 deals since 2014.

Despite the recent debate surrounding Chinese interest in Israeli technologies, American multinationals continue to dominate the field, with US-owned subsidiaries representing more than 200 of the 362 multinationals operating in Israel. Fewer than 50 Chinese corporations are currently active in Israel, surpassed by the operations of both German and British companies.