Israel has announced that it will implement a qualified domestic minimum tax (QDMTT) starting in 2026, a move that will affect global technology companies, such as Facebook, Apple, Amazon, Google, and Intel.
The move is part of an international tax reform by the Organization for Economic Cooperation and Development (OECD), according to the Israeli economic newspaper Globes.
The plan would change Israel’s current corporate tax system to allow more taxes to be collected from international companies that sell products or services to its citizens, rather than simply paying tax in a foreign country that imposes lower taxes.
Program objective
The program aims to modernize tax laws and allow them to deal with the digital economy and with companies that report their profits in countries that collect lower taxes than them, regardless of the countries in which they generate their profits.
The new tax will affect multinational technology companies operating in Israel, the newspaper reported.
The newspaper quoted Israeli Finance Minister Bezalel Smotrich as saying that the international standard on taxing multinational companies will help prevent tax leakage from Israel.
140 countries participate in the OECD plan, including Israel.
In June 2021, Israel announced through then-Finance Minister Avigdor Lieberman that Israel would join the digital economy tax plan.
The Finance Ministry said the decision to impose the tax was made, among other things, to prevent companies resident in Israel from paying taxes in foreign countries on income generated in Israel.
The affected
According to the newspaper, the agreement on a flat tax represents a major negative change for small economies, as these economies have for many years been tax havens for global companies after being offered low or no tax rates.
This represents a major change for Israel, where some multinational companies enjoy very low tax rates of up to 6% under laws encouraging capital investment, according to the newspaper.
If the plan is adopted, according to the newspaper, companies such as Intel, which are subject to taxes at rates lower than 10% for setting up factories in remote areas, will be required to pay a tax at a lower rate of 15%.
Organization plan
The OECD’s plan to tax the digital economy is based on two levels:
- The first level (first pillar) deals with taxing the profits of giant international companies by countries that provide services or products to their residents when it is possible to tax part of the profits of these giant companies in the countries in which they operate even if they do not have a headquarters there, according to the Israeli newspaper.
- The second level (Pillar II) seeks to prevent tax schemes that aim to erode the tax base or shift profits to tax havens for multinational corporations, and to put an end to competition between countries to lower tax rates to attract companies. According to the plan, a minimum tax rate will be set that applies to members of these companies.
The second pillar will apply to multinational companies with an annual turnover of €750 million ($812.55 million).
Under the second pillar, countries participating in the program must apply an effective corporate tax rate of at least 15%, according to Globes.
