Eden mineral water on sale in Israel, May 15, 2010
Eden mineral water in an Israeli store. The windfall profits tax would cover bottled water, among other natural resources. Photo by Ofer Vaknin
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Saying the public was not deriving sufficient benefit from Israel’s natural resources, the Sheshinski committee recommended in an interim report submitted on Sunday that companies exploiting everything from potash to mineral water should pay a 42% windfall profits tax.

“The present fiscal regime governing natural resources extracted by private companies is regressive, which means the public doesn’t receive its fair share of the profits,” committee chairman Eytan Sheshinski said in a statement. “We recommend establishing a progressive tax system that corrects this failure and at the same time guarantees appropriate profits for private enterprises. Adopting the recommendations will bring the government additional revenues of hundreds of millions of shekels.”

The report cited an International Monetary Fund study commissioned by the committee that found that the government’s take from companies posting medium- to high-profitability was among the lowest in the world. It estimated the proposed tax-and-royalty regime would add some 500 million shekels ($144.5 million) to state coffers.

The higher tax will have the biggest impact on Israel Chemicals, which mines potash and other chemicals from the Dead Sea and in the Negev. But the company would pay lower royalties, under the committee’s proposal to impose a single royalty rate of 5% on all natural resources with the exception of petroleum and natural gas, instead of the current range of 2% to 10%. The report said ICL should see its royalty rate drop from 8%.

Shares of ICL, which issued no official statement on the report, closed 2.1% lower to 30.63 shekels on the Tel Aviv Stock Exchange. It was the most heavily traded stock of the day.

“The recommendations seem a lot worse than expected and will surely cause Israel Chemicals to divert most of its investments abroad,” Gilad Alper, a senior analyst at Excellence Nessuah Brokerage Services, told Bloomberg News.

The current Sheshinski committee was appointed by the Finance Ministry last June to examine fiscal policies on the exploitation of natural resources. A previous incarnation of the panel dealt specifically with Israel’s petroleum and natural gas industries.

“The country’s natural resources are a public asset and as such we have to ensure that the Israeli public benefits from them,” said Finance Minister Yair Lapid. “The income from natural resources will aid projects that encourage economic growth and increase spending on social services -- more teachers for the schools, more hospital beds and more social services.”

The interim report is now open for public comment. The committee’s final recommendations will later be submitted to the cabinet.

Excessive profits

The committee found that the exploitation of natural resources such as potash, bromine, sand, gravel and mineral water allowed companies to earn excessive profits because the government’s take averaged only 23% over the past seven years. In contrast, in the oil and gas sector, the government’s share of profits from taxes and royalties now exceeds 50%.

The committee estimated that a 42% tax on all natural resource extraction would increase the government’s share to between 46% and 57% of the total profit. The tax would be calculated on the basis of the company’s audited financial reports and paid only on returns on assets of at least 11%.

The windfall profits tax would be in addition to corporate income taxes and any royalties paid on the specific natural resources each company exploits.

The committee said the unified 5% royalty it is recommending will bring Israel into line with international norms and provide a steady revenue stream for the government without overly burdening the companies. In exchange for the introduction of the single royalty rate, companies would no longer be entitled to deduct certain expenses from the calculation.

Among the committee’s other recommendations is that the value of natural resources be set by the government and not by the companies, as is the case today. The Tax Authority would also supervise so-called transfer pricing models the companies use to ensure to ensure that natural resources are valued internally by companies and not under-priced in order to reduce their tax liability.

Israel Chemicals

A number of these issues are at the heart of a major arbitration case between the government and Israel Chemicals over the royalties it has paid for years for minerals its Dead Sea Works has extracted. A decision on the case is due this week. The government is demanding $291 million in unpaid royalties, which ICL is fighting.