The taxmen have conducted meetings with clients of Google, asking detailed questions about the methods used by Google and Facebook to conduct local operations.
Questions put to clients centered around the degree of involvement that local representatives of Google and Facebook had in designing marketing campaigns, and setting budgets and targets for clients.
Basically the Israeli’s are unsure if the Israeli teams were acting independently, or if they were referring business matters to overseas headquarters and then merely implementing corporate decisions in the local market.
Should the investigation conclude with the determination that Google and Facebook Israel teams are independently responsible for activities in the local market, the tax authority may recommend that the companies pay a rather a large tax to the Israeli government for business conducted within the country.
Facebook and Google claim that they operate in Ireland, thereby avoiding paying direct or indirect taxes to the Israeli government.
Research shows that total online advertising expenditures topped $333 million in Israel in 2015, with online taking an ever-expanding segment of budgets from traditional advertising. Of that $333 million, over half was dedicated to spending on social media and search sites, two areas dominated by Facebook and Google.
In April 2016, the Israel Tax Authority unveiled a new set of guidelines regarding tax liability for foreign corporations operating in Israel. Under these rules, an international company would owe taxes if its services were produced in Israel. To prevent double taxation with countries that have international tax agreements with Israel, the foreign corporation must have a permanent establishment within Israel.
A permanent establishment was defined as a physical space used by the business to conduct operations, or a virtual space – including a website – where agents are empowered to conduct local business and enter into contracts on behalf of the corporation.