Teva
Teva's factory in Hungary. Photo by Bloomberg
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State Comptroller Joseph Shapira came down hard on the subsidies and tax benefits the government awards companies that invest in new and expanded factories, saying its costs had ballooned in recent years while not showing any demonstrable benefit to the economy.

In a report submitted to the Knesset, Shapira said only a small number of companies benefitted from the Law for Encouraging Capital Investment and that the companies receiving the benefits often did not reinvest profits in Israel as they were supposed to as a condition for getting the aid. The scathing criticism prompted Economy Minister Naftali Bennett, whose office is responsible for awarding the aid, to reexamine the law. Finance Minister Yair Lapid echoed the call.

The report came just days after Teva Pharmaceuticals, which has received some NIS 12 billion in tax benefits, said it planned to lay off hundreds of workers in Israeli plants, in addition to thousands more abroad, as it cuts costs by some $2 billion annually. Teva said in response that the aid was never made conditional on the company refraining from layoffs.

“The public feels betrayed when a large company that receives generous tax benefits thinks when the time comes to pay taxes on its profits that it must tighten its belt and the result is layoffs when the benefits were precisely for providing jobs,” Shapira said.

However, the State Comptroller said he has no intention of investigating the benefits Teva receives from the government. “The government knows better than me on this matter....I’m sure the finance minister or the prime minister will address this with the appropriate sensitivity,” Shapira said.

Meanwhile, Teva is in a dispute with the Tax Authority over an interpretation of a clause in the law that exempts companies from paying taxes on profits not distributed as dividends. Teva is claiming that these so-called “captured profits” can be used to acquire companies and remain tax exempt. Tax officials said the two sides would probably reach a compromise on the issue before the expiry on November 11 of a government program offering a lower tax rate to companies that pay dividends on the profits.

The State Comptroller said the law had been legislated and amended -- in particular the captured profits section -- over the years without ever studying its ability to achieve the goals it was designed to achieve -- promoting sustainable employment, economic growth, innovation and strengthening the Negev and Galilee regions economically.

When the law was amended in 2011 to make the tax-benefit option more attractive and discourage the use of outright aid, the Finance Ministry's budget division estimated that it would cost the government some NIS 3 billion to NIS 4 billion annually. A year later the captured profit amendment was added and current estimates place its cost at NIS 10 billion a year.

That compares with just NIS 2.3 billion in tax benefits in 2003, a figure that had risen to NIS 5.6 billion seven years later

The State Comptroller leveled severe criticism at the Tax Authority for failing to estimate the cost of the captured profit amendment, which has been used by other companies such as Intel Israel. Shapira said the economy and finance ministries, which are responsible for administering the law, “never created any mechanisms for channeling the benefits of the law according to its stated goals and did nothing to limits its use. Because of that, benefits were given to companies without examining if the money was being used for the purposes designated.”

Among other things, they never established any quantifiable measures for the law’s success, and have no system for following up on the law’s impact on tax revenues or assessing the law’s cost to the economy. Shapira said it would not be enough to simply amend the law as it now stands. Treasury officials responded on Tuesday by saying that it is impossible to forecast the effect of tax benefits on tax revenues because too many factors were involved. They said that similarly it would impossible to forecast the impact on reducing or eliminating them.

In regard to the captured profits, the State Comptroller found that from 2003 to 2010, some 55% of the total, or approximately NIS 52 billion, were generated by just four companies. Their share rose over the years from 31% in 2003 to 73% in 2010. Despite a reduced tax rate for companies that opted to pay them out as dividends, most refused to and as of the end of 2010 beneficiaries had amassed some NIS 125.5 billion in captured profits, the Comptroller said.