Israel mulls further tax cuts after US unveils reforms

After the US Senate passed its comprehensive tax reform plan in early December 2017, which slashed the US corporate tax rate to 20%, Israeli finance minister Moshe Kahlon said Israel might have adjust its own corporate tax rate.

In general this is unsurprising as companies consider the statutory tax rate of a country as part of their site selection, along with its effective rates. According to Matt C Pinsker, a professor at Virginia Commonwealth University, it is reasonable to expect several countries to compete with the US by lowering their corporate tax rates. Whether they all succeed is another issue.

“Just like in the US, other countries have issues with gridlock and general disagreement on tax policy, so not every nation will be successful in lowering taxes,” Mr Pinsker said.

What is interesting about Mr Kahlon’s remarks, however, is that Israel only recently tweaked its corporate tax rate. In December 2016, the Israeli parliament approved the Israeli Budgetary Law for 2017 and 2018, which reduced the regular corporate tax rate. On January 1, 2017 the rate was lowered to 24% and an additional reduction is expected on January 1 2018, to 23%. There were other components to the law: owning intellectual property in Israel, for example, was made more attractive to foreign firms.

The changes were made for all the usual reasons: the Israeli government hoped to encourage multinationals to locate operations in the country – especially, according to EY, their intellectual property ownership and profits. As it happened, in 2017 FDI into Israel reached its highest level since greenfield investment monitor fDi Markets began recording data in 2003. This was not a direct result of the tax increase, at least not entirely; inflow has been steadily increasing since 2015.

How likely it is that Israel will push through another rate change remains to be seen; it is likely to be absorbed with the game-changing move of the US recognising Jerusalem as the Israeli capital for the foreseeable future.

And even if Israel drops its corporate rate even further, the US will still remain competitive. Site selection, after all, is not just a comparison of tax rates, says ProVision CEO Tom Wheelwright. “There would continue to be a strategic advantage to setting up facilities in the US,” he said.