Tax Authority Wins 1.5 Billion Shekel Claim Against HPE

International computer giant HPE (formerly Hewlett-Packard) has been slapped with a 1.5-billion-shekel tax on its 2006 acquisition of the intellectual property of Israel company Mercury Interactive, according to Globes.

The ruling in favor of the Israel Tax Authority’s claim was the result of international arbitration between the claim and HPE. The payment will be added to NIS 1 billion already paid to the Tax Authority for the deal.

The arbitrators mediated a compromise agreement, which calls for the cancellation of a NIS 4 billion in the Tax Authority’s assessments for 2009 and two larger assessments of NIS 9 billion and NIS 7.2 billion for 2007 and 2008.

HPE acquired Mercury Interactive, which supplies business technology optimization (BTO) systems, for $4.5 billion in cash in November 2006. The deal was regarded at the time as HPE’s largest software acquisition up until that time.

At issue in the case was whether the acquisition, ostensibly made in two separate stages — first for the shares in Mercury Interactive, then for the company’s intellectual property. Assessment in two stages allows the buyer to pay a much lower tax for the intellectual property than it would had the deal been viewed as a single transaction. This, despite the fact that it is the intellectual property, not personnel and hardware, which is the chief objective of the acquisition.

The Tax Authority argued that only one deal was involved: the sales of the intellectual property, which was taxable at the full value of $4.5 billion, not the $963 million paid later for the transfer of the intellectual property.

HPE objected, and the parties agreed on international arbitration, conducted by an expert in the U.S.

The HPE case is only the latest in a series of such disputes over acquisitions. Recently, the Central District Court ruled that Microsoft must pay over NIS 100 million in tax on the transfer of the activity of its Jitco subsidiary from Microsoft U.S. to Microsoft Israel. Tax Judge Dr. Samuel Borenstein upheld the position of the Kfar Saba tax assessment office against the appeal filed by Jitco against the assessment, under which it must pay tax on the transfer of activity between related companies.