With coalition negotiations getting into full gear now that the Passover holiday is over, Finance Ministry officials will also be gearing up to address the country’s burgeoning budget deficit. One of the possible steps under consideration is looking for new tax revenue from Google and Facebook in connection with their operations in Israel. The Finance Ministry and the Israel Tax Authority plan to generate 1 billion shekels ($275 million) in taxes in 2019 from the two companies and other digital firms.

Last week there was a media frenzy over an Israeli court decision ordering supermodel Bar Refaeli to pay tax on tens of millions of shekels in overseas income earned in 2009 and 2010. But the sums in question pale in comparison to the amount some large corporations avoid paying in connection with their operations in Israel.

Many digital firms know how to conduct some aspects of their activity far from public view even though the members of the public are the major consumers of their services. Take Google and Facebook, for example, two multinational giants that have avoided paying substantial taxes in Israel and in many other countries. They do pay other taxes, such as value added tax and wage taxes but no Israeli income tax.

They argue that their taxes are paid where they have what in tax parlance is called a “permanent establishment.” By their standards, they have only branch offices in Israel. Both companies have major offices in the United States and Ireland. Facebook pays substantial tax in Ireland, and Google in the United States. But many countries fume about such claims and say the digital economy is full of loopholes that make it hard to tax these companies on their local operations.

Plugging the budget gap

Israel’s incoming government will have to collect more in taxes in 2019 and 2020 to bridge a huge budget shortfall of about 10 billion shekels. That could include limiting tax exemptions or an value added tax rate hike. (At the click of a button, a 1 percentage point increase in VAT would generate 5 billion shekels a year). It could also include budget cuts that would be felt by the country’s citizens.

Under such circumstances, it wouldn’t be fair to exclude the collection of more tax from successful businesses as well, and including Facebook and Google. The Treasury estimates that tax revenue from the digital economy could add at least a billion shekels a year to the state’s coffers. Tax Authority head Eran Yaacov has been holding talks with both companies over the past year to resolve the issue.

The two sides have come to a measure of understanding that the current situation cannot continue but there are still differences to be bridged. One of the options under consideration in Israel and elsewhere is to require the firms to pay a 3% to 5% turnover tax on revenue generated from their local activity. France recently passed legislation imposing a 3% turnover tax on large digital firms Google, Apple, Amazon and Facebook.

Facebook said in response that it has been shifting to a local sales structure in countries where it provides support to its advertisers and will pay local taxes on income generated by local staff in the countries, including Israel. Facebook pays and will continue to pay all necessary taxes by law, the company added.

Google declined to respond for this article, but the company recently reported that, on a global basis, it has paid taxes over the past decade at an effective rate of 23%, and that 83% of the taxes were paid in the United States.