News Israeli tax rule to disrupt digital ad market
New rules unveiled by the Israel Tax Authority this week could mean global internet companies such as Apple and Google that generate over ILS800m ($212.5m) in annual advertising revenues may see a substantial portion of their profits liable for Israeli tax. This could prompt the downsizing of local operations and raising of company rates to counter declines in profitability. Although it is still too early to determine exactly how the rules will affect the market, many industry experts believe the imposition of corporate income taxes and VAT on online purchases of digital products such as ebooks, downloaded music and applications could leave companies such as Netflix, Amazon, Google and Apple with little choice but to pass on the tax costs to consumers.

The rules unveiled by the Israel Tax Authority on Monday could have far-reaching implications for multinational Internet companies such as Google and Facebook that generate more than 800 million shekels ($212.5 million) in annual revenues from advertising in the Israeli market.

The rules mean a good chunk of that revenue will go into government coffers as taxes, which could lead the companies to downsize local operations and will likely cause them to raise rates.

Yaniv Saban, a digital-marketing consultant, and others in the Israeli advertising industry said it was too early to tell how the news rules would affect the market.

“It could end up with the international companies reducing their local workforce because of the drop in profitability created by the change. For Facebook, it’s less significant because its sales force is small, but Google has a relatively big presence in sales,” Saban said.

Internet multinationals have ridden the wave of rapid growth in online advertising in Israeli in recent years, which has come at the expense of traditional print, television and radio advertising. Google, whose offerings include YouTube as well as its search engine and related services, is estimated to take in between 500 million shekels and 600 million shekels a year in Israel. Facebook is a distant second, with revenues of between 200 million shekels and 300 million shekels.

All told, the Israeli online advertising market is worth about 1 billion shekels annually, according to Ifat, an advertising research company.

Israeli companies buying advertising on Google and Facebook are billed through the companies’ offices in Ireland, a practice that until now has exempted them from paying direct or indirect taxes in Israel.

But even if formally speaking the billing is done through Ireland, the prices are calculated in shekels, by Israel-based agents, which means under the new rules they will be liable for Israeli tax.

Google declined to comment on the new tax rules and Facebook responded with a terse: “Facebook pays taxes in every country it which it operates, according to the law.”

On the other hand, there is a very significant industry based in Israel of companies that sell ads for overseas audiences. These companies, many of them in online gaming or digital-ad companies that serve as intermediaries between advertisers and online publishers, will still be exempt from taxes.

Domestic companies catering to the domestic market, however, will be liable as they always have been, Israel Tax Authority officials said.

As a result, said Adir Regev, CEO of the digital ad agency Go, local online publishes might benefit from the new tax rules, which will force Google and Facebook to effectively boost their rates by 17%, the same rate as the value-added tax they must charge under the new rules.

“Now they will be playing on a more level playing field opposite the international giants, so their ability to compete for ad budgets will improve,” he said.

The new rules not only impose corporate incomes taxes on multinational Internet companies, but they also impose VAT on online purchases by consumers for digital products like downloaded music and ebooks. As a result, companies like Netflix and Amazon will be forced to charge VAT. Likewise, applications sold by Apple and Google will be taxed.