Proposed marriage between Canadian, Israeli potash producers raises objections
Merger would make Canada's Potash Corp and Israel Chemicals one of the world's largest producers of the potassium-rich fertilizer ingredient. But government officials fear reduced production and lost profits.
Finance Ministry officials are concerned about a merger between the Canadian Potash Corporation of Saskatchewan and Israel Chemicals, fearing the latter's profits will be sent abroad to avoid a high corporate tax rate and royalty payments and that overall production may be affected.
PCS and ICL are among the world’s largest producers of potash, potassium-rich salts used in fertilizers. Between them, they control about a quarter of worldwide potash production and there is fear that a merger will drive up prices everywhere. A merger would also result in the companies controlling potash production in the Dead Sea region, since PCS is already a partner of Jordan’s Arab Potash Company.
When PCS made similar merger proposals in the 1990s, the Israeli government firmly turned them down, fearing the Canadian company might use its control over the Dead Sea potash mines to reduce production. That would have dealt a lethal blow to Israel's income from potash and to employment, since ICL is the Negev’s largest employer.
The development of the world market since then eased fears that PCS might halt production. But fears that the company might move profits outside Israel remain. PCS pays particularly high taxes and royalties in Canada – the Canadian government’s share of the potash profits is one of the highest in the world. But PCS also has factories in other countries, including Jordan, where government taxes are lower.
ICL was recently excluded from the Encouragement of Capital Investment Law, which among other things means it pays a reduced rate of tax. Within several years, it will begin paying corporate tax to the full extent of 25 percent. In addition, it pays royalties of 10 percent on its high production, thanks to a new contract with the state. If PCS wants to acquire ICL, the contract will likely be renegotiated and the royalty rate increased.
But the high rate of taxation, together with the high royalty rate, could motivate PCS to produce more potash abroad – for example, in Jordan. It could do so either by moving production or by changing the transfer prices – the prices at which the various potash factories sell products to one another. In this case, both the state’s income and employment in the Negev would suffer.
Although the state is supposed to oversee transfer prices, such supervision is complicated and ineffective. It will be difficult for the state to keep tabs on PCS output in Israel compared to other countries.
Senior Finance Ministry officials say high-ranking representatives will meet with PCS heads at the end of the month to hear details about the transaction with ICL and the corporate structure the deal would entail. At this stage, the officials say, ministry representatives will merely listen to PCS' proposal and determine their position afterward.
Sources close to the discussions believe the state will draft a list of restrictions for PCS to protect Israel’s interests after the transaction is completed, since Israel deems potash production a vital interest.
As of now, no meeting between company officials and the Finance Ministry has been scheduled.