The Supreme Court in Israel has recently ruled on a petition to include the tax levied on the employment of foreign employees in the calculation of the minimal costs of supplying manpower that is taken into account by the Chief Controller in assessing offers in public tenders. The petition was denied as being contrary to the governmental policy to increase employment of Israelis as reflected, inter alia, by the inclusion in public tenders, of a qualifying condition for participation that the contractor not employ foreign employees. The Appellant claimed that in practice, central and municipal government authorities enable the engagement of contractors that employ foreign employees. The court expressed its dissatisfaction with such a possibility and instructed the Attorney General to conduct an internal investigation indicating that, should it transpire that the state defaults on its own policy, the court would be willing to reconsider the legitimacy of the exclusion of the tax in the calculation of minimal manpower costs of offerees in public tenders. (Administrative Appeal Number 9001/16 I.B. Si-Mashabim Ltd. V.  Chief Controller of the Ministry of Finance and others).

In public tenders, the price offered by offerees has a significant weight in the choice between bids and is often the determining criteria. In tenders for the supply of manpower services, either directly or via a service contractor, the central and municipal authorities stipulate that the offeree prove that the offer is based on payment to the employees to be employed in the supplying of the services, of no less than the minimum wages and social benefits mandatory under the applicable law or extension orders.

Section 45 of The Law for the Recovery of the Israeli Economy for the Financial Years of 2003 and 2004 levies a tax on the employment of a foreign employee, which amounts to 20% of the income of the foreign employee and which must not be deducted directly or indirectly from the income of the employee. The purpose of the tax is to incentivize employers to employ Israeli rather than foreign employees, especially in fields that are unattractive to Israeli employees.

Therefore, it is self-evident that excluding the tax in calculating the minimal costs of supplying manpower  taken into account by the Chief Controller in assessing offers in public tenders, automatically places the employers of foreign employees at a disadvantage.

The petitioner in the above mentioned administrative appeal petitioned the court to enjoin the Chief Controller to include said tax in said costs, so as to create a level playing field for offerees  that employ foreign employees.

Though it may appear that the petitioner's complaint is justified since the tax is levied also in respect of  foreign employees lawfully employed, the petition was rejected because the inequality decried reflects an intentional government policy to increase the employment of Israeli employees. This policy is also reflected in a directive promulgated by the Chief Controller, prohibiting central and municipal authorities from engaging contractors that employ foreign employees. Moreover, this prohibition is included as a qualifying condition for the participation of an offeree  in a public tender.  The Supreme Court endorsed the government's policy of  "increasing the employment opportunities of Israeli employees by limiting the employment of foreign employees (quote from the preamble to the Chief Controller's directive number 7.12.9.), stating that " The employment of foreign employees limits the employment opportunities of Israelis and has far reaching security, fiscal and social ramifications on the Israeli market"  (quote  from State Comptroller Report number 46) and that "It is quite indisputable that a fiscal policy aimed at reducing unemployment and encouraging local employment is appropriate and fair…"

The petitioner argued that in practice, central and municipal government authorities enable the engagement of contractors that employ foreign employees but that the cost of the tax is nevertheless not included in the Chief Controller's calculation. The High Court expressed dissatisfaction with such a possibility and instructed the Attorney General to conduct an internal investigation indicating, that should it transpire that the government defaults on its own policy, the court would be willing to re-consider the legitimacy of the exclusion of the tax in the calculation of minimal employment costs of offerees in public tenders.

The message relayed by the High Court is that declaring an appropriate policy is  fine, well and good, but that if a lack of ready and able Israeli employees forces contractors to employ foreign employees, the contractors should not be the ones who pay the price and the Chief Controller should reconsider its policy of excluding the tax levied on foreign employees in the calculation of minimal employment costs of offerees  in public tenders.