Israel Debates Whether Tax Breaks for High-tech Will Help Its Economy

Intel’s investment plans in Israel may spark a fresh debate over how the government should promote such projects.

The semiconductor giant built Fab 18 in the depressed town of Kiryat Gat after receiving a grant in 1995 from the government worth 38 percent of the total investment.

Israeli taxpayers financed $600 million of the total $1.6 billion.

The controversial grant was part of the government’s law for promoting foreign investment for approved projects.

Supporters said it would help attract more investments and create new jobs.

Opponents questioned the wisdom of backing a project that will generate billions of dollars in revenues to a multinational powerhouse.

Following Fab 18, Israel lowered these grants to between 20 and 24 percent of a total investment for priority zones like Kiryat Gat. However, even at this rate, the government cannot afford to finance a $3.5 billion project and has set up a special committee.

“We are very interested in the company continuing to grow here,” says Uri Stein, spokesman for Israel’s trade and industry ministry. “But an investment like this would wipe out our budget for several years.”

Other Israeli Trade Ministry officials assess that after the strong success of Fab 18, government assistance may not be the decisive factor in Intel’s decision this time.

Indeed, the Finance Ministry committee that recently proposed sweeping tax reforms suggested tax breaks for foreign investors be lowered and also recommended that Israel reconsider its policy on providing investment grants. The committee said it believes the “heavy flow” of investment in recent years is a sign that such grants may no longer be necessary.

But Hanan Achsaf, president of Motorola Israel, another multinational which generates $1 billion in revenues from Israeli manufacturing operations, warns it is way too early to eliminate government assistance.

“We should not underestimate the importance of government assistance,” he says. “Every country in the world wants foreign investment. It would be a big mistake to scrap government support.”

Kiryat Gat’s deputy mayor, Micha Gabay, agrees. “A plant like this that will receive massive government funding will return every cent it gets,” says Gabay.

“My hope is that most of the Intel workers will eventually be Kiryat Gat residents, and I believe that it will happen.”

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