Eran Shalev.

"IP location is vital for tax, R&D, and exit strategy planning"

Eran Shalev, Managing Partner of KPMG Israel, was speaking at the start of Calcalist and KPMG's Work After Work event

"The high-tech industry currently accounts for about 20% of the GDP of the State of Israel and 50% of Israeli exports. These figures indicate the dominance and centrality of the industry in the Israeli economy. Until recently, Israel was the third hub in the world after San Francisco and New York, with over 9,000 companies that have capital raising behind them, which means that the industry is also central to the global economy. Until recently, Israel was among the six hubs that raised the most money in the last decade, close to $100 billion," said Eran Shalev, Managing Partner of KPMG Israel, speaking at the start of Calcalist and KPMG's Work After Work event.
He emphasized the industry's dependence on foreign capital. "75%-80% of the total investments in high-tech come from foreign investments, about 50% of research and development in the business sector is financed by foreign capital, for comparison in the U.S. it is about 5%. This is a very central sector in the Israeli economy, which is highly dependent on foreign capital. The meaning is that we are faced every day with being attractive in order to attract foreign capital, which does not have big sentiments for Israel and can move from Israel to other hubs that flourish and develop at fast rates like London, Paris or Shanghai. We as a country need to think strategically about what we want this sector to be for the Israeli economy."
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כנס Work after Work - ערן שלו שותף מנהל KPMG ישראל
כנס Work after Work - ערן שלו שותף מנהל KPMG ישראל
Eran Shalev.
(Photo: Yariv Katz)
Shalev reviewed what has happened to the industry in the past two years: "From the middle of 2022 we are experiencing negative momentum, most of it is due to macroeconomic trends - the increase in interest rates, the availability of cheap capital that has gone, inflationary pressures, the war in Ukraine. All of these have had a negative impact on the sector in the world and also on Israel. But we have effects that are only ours as a result of the judicial overhaul that led to regulatory instability and the events of October 7 when we woke up to war. The geopolitical instability, the emphasis on which has been fading in recent years, has once again become a significant influence on what is happening here."
"Another layer is that we have by our side the reform on the taxation side, the Pillar 2 that will create equality or a minimum taxation of 15% and we have also lost the relative advantage we gave these companies in their taxation environment. That is, beyond the global influence there are elements in Israel that have created a situation where the returns of the technology companies and the amounts invested have been decreasing and the macroeconomic data between us and the world have started to create a growing gap. This should be of great concern."
"The number of technology companies that are established today in Israel has gradually decreased from a record of about 1,500 companies per year in 2015, to 500-600 companies per year today. And the most worrying figure is where they are registered. Until recently, almost 80% of the technology companies that were opened in Israel were registered as Israeli and the trend has reversed and today about 80% are registered abroad.
"The most important aspect is where the IP is located and in correlation where the development people are located and where the taxation will be when there is an exit. When we see the companies start submitting their tax returns in the coming months, we will understand the real damage of what happened in the last two years to the technological sector and the Israeli economy as a whole, which is a big threat and a great danger, because if the foreign capital stops entering this market, it means fewer companies, fewer technologists who stay and it is less interesting for global companies to open development centers here, and the meaning of this for the Israeli economy is very clear and scary."
Shalev offers some suggestions for actions: "First, stability, that is, we want to see stability in geopolitics, so we all pray that the war will end and we will return to creating a sane world here. In addition, regulatory stability and the cloud of legal reform must be removed.
"The second element is taxation. Pillar2 must produce a minimum taxation of 15%. The tax authorities need to provide a clear answer because the companies are now choosing where to place the IP. Even if we don't give a tax benefit compared to other countries, we should provide startups with grants, support and other things that can help companies succeed.
"The third element is to bring in the institutions. On the one hand, it is wonderful that foreign capital is entering Israel, but we must create stability here so that we can also bring the capital of the institutions into the game and mitigate a little the effect of the volatility of the foreign capital that moves from place to place without much sentiment and purely economic considerations,.
"We are in complex times, but we also have many reasons for optimism. I hope we will go in the right directions, that the hostages will return and this damned war will be behind us," Shalev concluded.