Senior Finance Ministry officials: Increasing taxes on high-tech workers is the last thing we need right now

The head of the Tax Authority, Shay Aharonovich, expressed support at the beginning of the month for examining an increase in the tax on options that high-tech employees receive as additional compensation to their salary. It has now become known to Globes that senior officials in the Ministry of Finance are strongly opposed to the initiative.

In the official response of the Ministry of Finance to Globes, it was stated that these are "hypothetical initiatives that were allegedly mentioned without the necessary staff work being exhausted regarding them." After Aharonovich's words caused a stir, sources in the Ministry of Finance admitted that they are examining an increase in the tax on options for employees alongside a reduction in the tax on wages.

How significant this compensation component is can be learned from the estimate that the value of options held by high-tech employees in Israel, which are "in the money," was estimated at the end of last year at about 150 billion shekels. This is according to Modi Shafrir, chief strategist for financial markets at Bank Hapoalim (not including options of private companies). In the market, it is said that since then, the amount has continued to grow.

Today, it is usually possible to exercise options about 90 days after the end of employment. Experts explained to Globes that according to the Income Tax Ordinance, in order to enjoy the tax benefit, it is required that the shares be held by a trustee for 24 months from the date of allocation.

What is being examined and what are the trade-offs?

The stick

Increasing the tax on options for high-tech employees.

The carrots

Early sale takes the options out of the benefit track and all profit becomes income from work subject to tax of up to 50%. With the addition of National Insurance and health tax, it reaches an effective tax of up to 62% compared to a capital gains tax of 25%. The result: the exercise is delayed, and the state treasury is also harmed.

This is the main reason why the Tax Authority raised the possibility of changing the rules and incentivizing early exercise. If we rely on past cases, such as the "trapped profits" reform, the very intention to raise the tax on options in the future may bring a wave of exercises that will also roll into a significant additional tax for the state treasury.

Disproportionate burden

Sources who spoke to Globes pointed out that the taxation in the current format is "distorted" because it is actually a substitute for salary that should be taxed as salary. In the team, they estimate that as of today there are billions of shekels "trapped" and their value continues to rise, but they are not being exercised.

In the current situation, at the time of exercise, the taxation is not graded like the marginal tax and has no ceiling. "There could be a situation where an employee earns 100 million shekels and pays a tax of 25%," one of the sources told Globes.

The initiative mentioned was also intended to offer carrots such as reducing the tax on income from work and partial taxation of options. However, it now seems that this initiative does not enjoy a consensus in the Ministry of Finance headquarters management.

Sources distanced themselves from the initiative, with one stating: "The last thing we need right now is to burden high-tech workers," adding that it is not a disaster that there is a tax bias in Israel that benefits high-tech workers.

These things were said against the background of the fact that high-tech is the growth engine of the economy, while a disproportionate burden on it and its employees could harm the GDP, in an era when Israel serves mainly as a source of development, while production and sales are done in a large part of the cases abroad, alongside the development of AI and waves of layoffs in the industry.

The high-tech sector is responsible for about 18% of the GDP, for about 60% of exports, for about a third of the GDP growth in Israel since 2017, and income tax payments from it constitute about 24% of all direct tax payments in Israel.

On the other hand, the Tax Authority says that this is a possible step, which is being examined among a set of measures in the tax field ahead of the next Arrangements Law, including measures that will ease the tax burden on employees and incentivize the activity of companies.

In response to Globes' question, the Ministry of Finance stated that "any examination of possible tax measures is done while giving great weight to maintaining a business environment and a competitive tax regime compared to the world. This is especially true for exporting industries, including the high-tech industry. We will not comment on hypothetical initiatives that were allegedly mentioned without the necessary staff work being exhausted regarding them."

Plans for the future

In the Ministry of Finance, they are expected to examine ahead of the next budget a law to incentivize the registration of high-tech companies in Israel and complete the legislation of benefits and regulation of the taxation of investment funds. In addition, a decision will have to be made regarding benefits within the framework of the "Angels Law," which includes tax incentives to encourage investments by individuals in startups and whose validity ends at the end of the year.

The law was approved in 2022, but criticism argued that it is a benefit that costs the state hundreds of millions and is intended for investors from the top percentile.

However, even if the taxation on options ultimately remains outside the moves that the Ministry of Finance will promote ahead of the next state budget, it is certainly expected to include many harsh measures and tax increases.

Budget expected to be breached

As revealed in Globes, the government is expected to make a decision this week on opening the state budget and earmarking tens of billions of shekels in the coming years for the defense budget, an addition that will come on top of huge budgets that have tripled in recent years following the war that broke out on October 7. In addition to the current defense budgets, the government will also try to fix in the "numerator" (the three-year budget plan) the implementation of the army's buildup plan at a cost of about 400 billion shekels.

These expenses, together with the state's heavy interest payments, which reached about 40 billion shekels last year, will require an increase in its revenues. There is also a dispute about this in the ministry's management.

According to the position of senior officials in the Ministry of Finance, one can rely on positive surprises from tax collection, but others believe that this is recklessness and the tax collection base must be increased, so as not to harm civilian spending, which is considered low compared to developed countries.

Among the initiatives being examined are far-reaching changes in pensions and the reduction of tax benefits as well as the reduction of mandatory pension contributions, the fight against black capital through the obligation to issue a number for an invoice for any amount by the Tax Authority, the reduction of tax benefits for various settlements and sectors alongside the reduction of the burden on labor taxation, and the examination of the taxation and incentive system in Israel in light of the development of AI.