Corporate tax to be reduce to 23% by 2018

ISRAEL - In Brief 20 Jul 2016 by Jonathan Katz

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Due to higher-than-expected tax revenues, the MOF annouced a 4bn ILS tax cut in 2017, reducing the corporate tax rate to 24% (currently 25%) and lowering income tax brackets by 2%. A further reduction of the corporate tax to 23% is planned for 2018. In the past few years Israel has maintained strong fiscal credibility as revenues have surprised on the upside and expenditures on the downside (below budget allocation). MOF minister Kahlon's more expansionary stance could weaken credibility if growth disappoints. The BOI is not in favor of cutting taxes and prefers to increase non-defense spending which is relatively low in Israel (% GDP) or reduce the public debt (currently 64.6% in 2015). The MOF chief economist released an updated macro forecast and tax revenues through 2018. The GDP growth forecast was revised downwards to 2.5% in 2016 (from 2.8%), 2.7% in 2017 (from 2.9%) and 2.8% in 2018 (from 2.9%). This more modest growth forecast is due to slower global growth assumptions (global trade) and downside risks, including Brexit. The chief economist expects private consumption to continue to be main economic driver, fueled by real wage growth (2%-3% annual) and steady employment growth of 2% on average in 2016-2018. The MOF expects the current account surplus to contract somewhat due to more expensive imported energy (compared to 2015). The fiscal revenue forecast was revised upwards due to mostly one-factor factors such as the surge of highly taxed imported vehicles as well as a widening of tax reporting by self-employed.