dead sea - Alberto Denkberg - December 14 2010
The sea is encroaching on the hotels, which are expected to start drowning by 2017. Photo by Alberto Denkberg
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Hotels along the Dead Sea are expected to be under water by 2017, inundated by the rising evaporation ponds operated by Israel Chemicals Ltd. To prevent tourism from being extinguished at the resort, ICL, the Israeli government and the Tamar Regional Council are expected to invest NIS 3 billion to NIS 5 billion to move the affected hotels to higher ground. ICL, which is part of Idan Ofer's Israel Corporation, will cough up 40%, or up to NIS 2 billion, while the government will cover 35%.

"The change in the level of the Dead Sea where the hotels are located isn't a simple problem," said Udi Nissan, the Finance Ministry's budget director, in an interview with TheMarker. "But my view of the problem is that it could present an opportunity, because the hotel area is dated and its environmental development isn't ideal, to say the least."

The rising water level results from accumulating salt formations at the bottom of ICL's evaporation ponds. Until now, the company has surrounded them with dikes, but the problem is expected to worsen in the coming years. A committee set up in 2008 suggested three alternatives: dredging the salt accumulations, which would cost an estimated NIS 7 billion, building a lagoon around the hotels, at an estimated cost of NIS 5 billion, or tearing down the hotels and rebuilding them from scratch, which would cost NIS 3 billion to NIS 5 billion.

Package deal

It seems the treasury wants to promote the third option. "The solution requires a substantial investment in any case," Nissan said. "Therefore, it is best to connect the problem with an opportunity, which presents itself in the proposal to rebuild the hotel area on higher ground while developing the surrounding landscape. Hotels located right by the shore will be relocated to the new area. The alternative of dredging the salt is much more expensive, and a second-rate hotel district would remain, without the area's potential being developed."

The treasury confirmed that it intends to offer ICL a package deal that will combine its contribution to rehabilitating the hotel district with the issue of past and future royalties from potash sales. The treasury is demanding about $115 million in unpaid royalties from ICL on revenues that it claims were concealed in accounting transfers between the company's subsidiaries. ICL insists that it has adhered to the law in its royalty payments and hasn't concealed any revenues to reduce them. The issue is expected to go to arbitration shortly.

Doubling the royalty rate to 10%, retroactive to 2010, will also be up for discussion.

Another bone of contention between the treasury and ICL is the proposed new Law for the Encouragement of Capital Investment, which would end the company's enormous tax benefits. Under the new law, companies that don't have the option of relocating their main activities abroad wouldn't qualify for the benefits. ICL has waged a desperate campaign over the last few months to retain these benefits, which until now spared it an average of NIS 500 million per year in tax payments.

The Jerusalem lesson

The idea behind the new law, Nissan said, goes back to his years as CEO of the Jerusalem Development Authority in 1999-2002, when he fought to bring high-tech companies into the city. He eventually realized that as long as government tax breaks were also available in the center of the country, high-tech firms would always prefer operating there.

"We tried bringing Teva Pharmaceuticals to Jerusalem, which was then defined as an outlying district for high-tech companies only, so as to bring more sophisticated business into the city," Nissan recalled. "And we still needed 20 meetings to convince them. It was such an obvious pretense that outlying areas were being encouraged, when in actuality all the benefits were available in the center of the country to an extreme degree.

"Another insight behind the new law was the waste of investing in [physical] capital at the expense of human capital," Nissan continued. "The current law grants benefits for capital investment, but the high-tech world is based on investing in human capital, and that shouldn't be discriminated against in outlying regions.

"Another issue is the multitude of provisions in the law and the variety of plans it offers, which make it hard for small businesses to identify the benefits for which they qualify without the cadres of accountants and lawyers that large companies have. This complexity led to the phenomenon of fixers, who still roam the corridors of power, though they now sport business cards from some of the country's top law and accounting firms," he added.

The current law grants tax benefits worth about NIS 5 billion, but mainly to five large concerns, led by Teva and ICL.

The treasury wants to distribute this amount on a more equitable basis among more companies, including mid-sized and small businesses.

The new law would cancel all existing benefit plans except the one to encourage investment by multinationals. It would set corporate tax for qualifying exporters in the country's center at 12%, and in outlying areas at 8%, beginning in 2013. Nonqualifying companies would pay the regular rates, which are slated to fall from 25% in 2010 to 24% in 2011 and bottom out at 18% in 2016.

The law won't cover companies that can't move their operations overseas, like mineral-based or tourism enterprises, nor will it cover government companies, since the government determines where they invest. The first provision would exclude ICL, which in recent years has received tax benefits of NIS 400 million to NIS 800 million per year, depending on its income.

'The law isn't anti-ICL'

The section of the new law that has raised the biggest outcry is, predictably, the one excluding certain companies from benefits. "Should someone whose location we don't really have any influence over pay lower taxes at the taxpayers' expense?" asked Nissan. "Isn't it better to invest the same resources in encouraging other companies to come or to stay here?"

What other companies will be hurt by the law?

"This isn't a law against ICL and we don't have anything against ICL. We are giving the tax benefits to companies that export and could apparently relocate their businesses abroad. The exclusion is just for companies involved in minerals and tourism. The hotels are here, and therefore won't enjoy the benefits. The comparative advantage of a hotel in Jerusalem is Jerusalem."

What will you do if the Knesset Finance Committee's interim proposal, to cancel just half the benefits, is passed?

"Regarding ICL we have a very clear view: that it wouldn't be right to allow it half the benefits. It would be a mistake to take incentives from companies that could be encouraged to build plants in Israel by them and divert them to companies where the benefits have no influence over their location, but only serve to increase the profits of their owners and shareholders. From our point of view, this is nonnegotiable, and I hope the Knesset looks out for the public welfare and that of the outlying regions."