Melchior, Sheshinski, Nasradishi.
Melchior, left; Sheshinski, center; and Nasradishi. Photo by Michal Fattal
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After a difficult year-long process, Israel is welcoming a new fiscal policy for its natural gas reserves - one that could be worth at least NIS 120 billion to the nation.

The Knesset approved the Sheshinski bill 78 to 2 yesterday, increasing the state's take from oil and gas exploitation to between 52% and 60% in the future from 30% today.

The two opposing Knesset members were Uri Ariel and Michael Ben Ari from National Union.

"This is a badge of honor for Israel's Knesset, the coalition and the opposition, which stood firm in the face of the pressure and came to a moral, correct decision," said Finance Minister Yuval Steinitz. "I knew it would be long and difficult, but I didn't know the extent."

The law passed after the MKs rejected objection after objection to the bill. Members of Yisrael Beiteinu, including Infrastructure Minister Uzi Landau, withdrew their opposition earlier in the morning. The Yisrael Beiteinu MKs had long been vocal objectors to the bill, and Landau said he objected to it because it transferred authority from the Infrastructure Ministry to the Finance Ministry by making the official responsible for gas and oil exploration report back to the Tax Authority.

As of the morning his party was trying to push through changes that would have the government recognize the gas companies' financing costs even once extraction had begun - a benefit that would be worth hundreds of millions of dollars. The Finance Ministry, therefore, strongly objected. Once Yisrael Beiteinu's Knesset faction realized it would have little chance of gaining a majority to support this change, it withdrew its objection to the bill.

The law is based on the work of the committee headed by Prof. Eytan Sheshinski, which was set up last April 13 to review the government's tax policy on its natural resources. The committee recommended raising the government's take significantly, as it was one of the lowest in the world, to the chagrin of the gas companies drilling in Israel's coastal waters. The committee came under heavy pressure from the companies and their supporters, which included an alleged smear campaign as the committee prepared to publish its conclusions.

The law does include several concessions to the gas companies that did not appear in Sheshinski's recommendations, which themselves were softer than the committee's interim report.

The law stipulates that the government's take from gas and oil exploitation will change based on the gas companies' profitability - the more profitable the gas reserve, the larger the government's percentage. The recently discovered Leviathan prospect is expected to be particularly profitable.

The law sets several exemptions for gas reserves discovered before the committee was appointed - the government's take from the Tamar reserve is expected to be only 57% or 58%, for instance.

Had the law not been passed, the government take would have been only 24%, once adjusting for the reduction in corporate tax planned by 2016 - one of the lowest rates in the world.

The OECD average is 60%.

Israel's previous policy had not been updated since 1952.

The Sheshinski Committee ruled that instead of increasing the government's royalties, currently set at 12.5% of revenues, it would impose a new, progressive tax on profits. The tax will equal 20% to 50% of profits after deducting exploration, development and financing costs incurred before gas is extracted. The companies will start paying this tax only once they have earned back 150% of their expenses, and the maximum rate will kick in only once they have earned back 230% of their expenses.

Regarding Tamar, the tax will kick in only once the developers have returned 200% of their profits, and it will reach its maximum rate once they have earned 280%. The Mari-B reserve off Ashkelon's coast, which has been producing gas for years, will receive an 80% discount on the tax next year and then a 50% discount until it runs out in 2015.

The law cancels the benefit the gas companies received as their reserves were exhausted, equal to 50% of corporate tax, but it also gives them the benefit of accelerated depreciation of 10%.

The gas companies also received a string of additional concessions thanks to their pressure on politicians and the Sheshinski Committee.

The new tax policy will give the state NIS 70 billion from Tamar, for instance, of the total NIS 120 billion in operating profits that that reserve is expected to bring in. In this case alone, this is NIS 40 billion more than the state would have earned under the old tax regime.

The state is expected to receive NIS 134 billion from the Leviathan reserve, which is expected to bring in operating profits totaling NIS 216 billion.