Israel currently has a territorial taxation system, rather than a personal taxation system, in place. Thus the Income Tax Commission has a hard time dealing with tax planning by software companies. These companies, dubbed by the income tax authority "diskette companies," register offshore and inform the authority that their activity takes place there, even if in truth their research and development centres are in Israel. A switch to personal taxation would mean that Israeli companies and individuals would be taxed in Israel for money generated anywhere in the world.

Deputy Tax Commissioner Oscar Abu Razek commented: 'When these companies stand to gain dozens and hundreds of millions of dollars this way, they don't think twice. They register abroad, and argue with us, asserting that their profit is generated there.'

Mr Abu Razek said that when traditional industries plan their tax to relocate taxable income offshore, they usually lose in court., but when "diskette companies" do so, they usually get the upper hand. The decision to try and reduce taxation for high-tech industries is an attempt to stop the exodus of companies in this sector.

Mr Abu Razek said: 'The interpretation of tax laws must be liberal, and the experience of the last few years proved to us that unless we are flexible - companies will simply flee the country, and the tax authority won't collect a single cent.'

In practical terms, the tax officer will negotiate with each company to reach an agreement by which only a small portion of the revenues will be deemed to have been generated in Israel. Total tax paid by the company, in Israel and abroad, will be less than the maximum currently levied in Israel.