I wish our country was more business friendly when it comes to taxes
You might not believe me, but I am huge fan of taxes, I think no country can exist without them, but taxes are implemented by a set of rules. Certain tax rules hurt our own business environment, most of the time in a way that will affect us negatively as a nation in the long term. After the latest PM storm regarding offshore accounts, we can’t say that we didn’t get a wake up call. The sad fact is as following; If our government isn’t planning to lower corporate taxes in Israel and change some outdated regulations, we are going to be in big trouble. If our own PM needed a tax haven, who can blame a small business for looking elsewhere?
You might be saying to yourself “well that’s obvious” — supposedly lower corporate tax should result in more successful companies and more jobs, right? Well, that isn’t my point of argument. I am arguing that if our government will not change its tax policy we might have less companies but that will only be on paper. If you are still confused, it is probably because this is a subject no one in Israel discusses. I am speaking about the “trend” of companies in Israel enlisting themselves as foreign entities, in order to enjoy a whole new different set of tax rules and commitments.
How does this work?
Let’s say you have a business idea, and you don’t like Israel’s tax policy or your business cannot be incorporated for legal reasons (e.g. a gambling business). So you incorporate your company in Cyprus (it could easily be some other tax haven), and you open a bank account there for your new corporate entity. After you get a legitimate company, you start to hire Israelis under your Cyprus-incorporated company, or even worse, you can hire them to your Israeli “only for expenses” company, which of course doesn’t pay any taxes because they are always losing.
Now, I am no expert at all of what the exact implications of this practice to our country are, but I do know that it is probably hurts us in many ways. Some of you might think this kind of practice is complicated — well I wish it was. Apparently if you have some initial spare cash, you can exploit this with an alarming ease. And if you need any examples of how abusive this is to us, the tax payers, just look at Google and Apple in the tax scandal from last year.
How does an Israeli startup business become “Non-Israeli?”
Many services are now available for Israeli businesses. There are start-ups such as Financial Guardian that take advantage of the increasing demand of entrepreneurs to open offshore accounts for their business needs. If you go to one of the countries they offer, the service is a one-stop shop for incorporating a firm abroad, opening a bank account and having a guy stationed to do all the paper work for you. Yes, this means that anyone here can open his company elsewhere without leaving their couch. This is a slippery slope for our nation, and it is the result of Israel being a very bureaucratic country when it comes to dealing with business owners.
What can be done?
First of all, Israel should re-think its strategy when it comes to taxing internet companies that deal with gambling or online investments. The gambling sector here is monopolized anyway and although you think it gives back to the community, check again the figures people earn in the Lotto and Toto.
The second thing that can be done is to give grants to companies that are deciding to stay. Look at Waze as an example. They were willing to pay a lot of taxes at the end of the road because they received support from the state. Now the problem with this support is that it comes back to haunt you at one point or another. If the Chief Scientist’s Office revises the amount of requirements, then it might be a more viable option for start-ups. The problem is that currently some new companies don’t want to deal with the Israeli bureaucracy to begin with, therefore they miss out on even trying to negotiate anything with the CSO.
Don’t get me wrong, I don’t blame any company that opens offshore accounts. I blame our country for forcing this decision on them to begin with. I hope something changes, because if not, we might see a new record when it comes to Israeli companies closing. And when I mean closing, I mean only closing on paper in Israel.
I love our startup Eco-system and I want to be 100% business friendly, but for Israel to be a better place for entrepreneurs things need to change and fast.
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