While Israel has undoubtedly weathered the global crisis fairly well, a recent OECD report on growth in 2014 warned that Israel has too much heavy regulation, which challenges competitiveness and equality. In response, Prime Minister Benjamin Netanyahu promised massive deregulation and tax cuts in the next year.
“One thing should be understood: the business sector develops the economy, and we need its tax base. My guiding principle has always been the attempt to lower the tax level. We haven’t always succeeded. Last year, we were forced to raise taxes. Minister of Finance Yair Lapid and I have decided to ease this, and I tell you that we will lower taxes in 2015,” declared Netanyahu before the Knesset last week.
Netanyahu, who served as Finance minister himself under Ariel Sharon, also promised to give incentives to risk-taking entrepreneurs who drive Israel’s “healthy and growing economy”, and to bring down the deficit to GDP ratio, which currently stands at 3%.
In parallel, the IMF published its own annual report on Israel, and gave mixed messages on taxation. While suggesting that Israel may have to raise taxes in 2015 and broaden its tax base by cancelling several exemptions that exist today (such as VAT tax on fruit and vegetables and products sold in the southern town of Eilat), it also warns against raising income tax, explaining that this is not the best way of increasing revenues.
Taxes are the focus of several current political debates, with several recent decisions seen as being populist, rather than motivated by pure fiscal policy. Yair Lapid promised a wave of budget cuts and tax raises when he came into office a year ago, but subsequently softened several of these decisions, and cancelled the proposed rise in income tax. Corporate taxes were a focus of intense debate, with the outcome being a modest 1.5% rise, still significantly lower than taxes companies pay in the US or France, for example.
All in all, from Netanyahu’s declarations, it looks like the present government is committed to easing the way for businesses to start up and operate in Israel. How committed, who will benefit, and by how much – all these are open questions that the business sector will have to wait to find out.
Written by: Aaron Huber
Aaron Huber is the founder of KYC Israel, a due diligence research firm that provides custom research solutions for clients needing information on Israeli businesses and individuals.