The Finance Ministry is recommending against imposing special taxes on artificial intelligence, ynet has learned, as the government examines how the rapid adoption of AI could reshape employment, corporate profits and the country’s tax base.
Finance Minister Bezalel Smotrich in recent months asked ministry officials to conduct a professional review of tax policy in an era in which AI tools are increasingly being integrated into the labor market and the broader economy.
The Tax Authority
(Photo: Yuval Chen, ChatGPT)
The ministry submitted its preliminary recommendations to Smotrich on Tuesday. The review, requested by the finance minister and led by Chief Economist and State Revenue Commissioner Dr. Shmuel Abramzon in consultation with government officials and representatives of the public, recommends against imposing taxes specifically targeting AI.
Instead, officials recommend increasing certainty in the tax system, favoring taxes that do not fall on labor, making Israel more attractive as a location for companies to operate and register and adapting the tax system to prevent income from being shifted abroad. The report also calls for coordination with international tax initiatives.
The report examines several scenarios for AI’s impact on the economy, emphasizing the considerable uncertainty surrounding the technology’s development. Its authors identify three main ways AI could reduce government tax revenue.
The first is an erosion of the tax base tied to employment, at least in the short and medium term. Scenarios involving job losses, stagnant wages and the replacement of Israeli workers with digital services provided from abroad could reduce tax revenue generated by domestic employment.
Chief Economist and State Revenue Commissioner Dr. Shmuel Abramzon Photo: Finance MinistryThe second concern is the potential transfer of Israeli high-tech profits abroad. The report warns that profits currently attributed to research and development conducted in Israel could increasingly be shifted to parent companies and countries with more advanced AI infrastructure, particularly the United States.
The third challenge is maintaining Israel’s global competitiveness and productivity growth. The report says preserving an internationally competitive business environment, including in taxation, will become even more important as AI assumes a greater role in the economy.
In its recommendations, the report concludes that the potential harm from a dedicated tax on robots, AI agents or computing capacity would significantly outweigh any benefit. Such taxes, it says, could undermine economic growth, technological development and the establishment and expansion of Israeli companies operating in the sector.
Instead, officials recommend keeping corporate tax rates no higher than internationally competitive levels while maintaining a favorable business environment, access to high-quality infrastructure and a highly skilled workforce.
The chief economist also recommends providing greater certainty over how AI-based economic activity will be taxed.
To address a possible erosion of the tax base, the Chief Economist’s Department recommends that any additional revenue be raised through taxes that do not directly burden employment. Options cited include taxes on undeveloped land, measures encouraging companies to distribute retained earnings and consumption taxes.
On international activity, the report calls for making Israel more attractive as a place for companies to operate and register, while adapting the tax system to prevent income generated in Israel from being shifted overseas. Proposed measures include more efficient tax enforcement and cooperation with international initiatives.
The report says taxation could, in some circumstances, also help allocate scarce resources associated with AI more efficiently and competitively, including energy and land.
The team headed by the chief economist will continue its review and is expected to submit updated findings and conclusions in the coming months.