Teva.
Teva's plant in Jerusalem. Photo by Bloomberg
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Finance Minister Yuval Steinitz decided to grant large multinational companies operating in Israel a huge tax break yesterday.

Steinitz issued an emergency order worth billions for companies such as Intel, Iscar, Teva Pharmaceutical Industries and Israel Chemicals. The order changes the tax rates on so-called "restricted profits," which the companies were required to pay higher taxes on if they removed the money from the country.

The tax breaks are for multinational companies that have accrued profits over the years in Israel, and now want to send them overseas as dividends.

The total amount of such "trapped profits" is estimated at NIS 120 billion by treasury officials. But parts of the new regulations would require Knesset approval. Steinitz would still have to submit a bill to the cabinet for approval and then have it approved by the Knesset.

Since the proposed law has yet to be finalized, it is unlikely that the changes could be made before the Knesset recesses for the summer at the end of July.

The explanation for Steinitz's caving in to the large companies is a hope for significant additional tax revenues in the very near future. The additional revenues for the state budget could reach NIS 5 billion to NIS 10 billion by the end of 2013, said a senior treasury official yesterday.

The most optimistic forecasts speak of even NIS 15 billion in additional revenues by the end of next year. But senior tax experts in the Finance Ministry estimate these companies would have owed NIS 25 billion to NIS 30 billion if Steinitz had not changed the rules.

The tax breaks are estimated to be worth a 25% to 35% cut in the taxes the companies would have to have paid under the present law. Steinitz conditioned the tax reductions on the companies reaching an agreement with the Israel Tax Authority on settling outstanding issues. A number of the companies are disputing their tax bills and assessments, and some have even gone to court over the matter. Steinitz's order would make it much easier for the companies to close their cases - and save huge amounts of tax.

Non-transparent and imprecise

Yesterday's announcement from the Finance Ministry was not clear and phrased in imprecise language. It is possible - if not likely - that the process of setting new tax rates under the new rules will be non-transparent and hidden from the public. The final agreements would be reached within the Tax Authority with the companies - and would not be open to public scrutiny.

The tax debate relates to multinationals like Intel and Teva that have accepted state aid under the Encouragement of Investments Law, which has entitled companies - including some of the world's biggest - to billions of shekels in state support over the years. The law was recently amended to allow them to repatriate profits, but companies have not been able to act on the change because of the continuing debate over the tax rate to be imposed.

Under the present law, companies are required to 10% corporate income tax. If they opt to repatriate the profit overseas as dividends, they are required to pay another 15% to bring the total tax due to 25%. But Steinitz's order would change all this.

The official statement said: "According to the decision of the [finance] minister, companies that have until now received an exemption under the framework of the old Law for Encouragement of Capital Investment, will pay the tax, but at a reduced rate.

"The level of the reduction will be set in detailed negotiations between the companies and the Tax Authority," said the ministry's announcement. "The emergency order will lead to the immediate receipt of a stream of tax revenues that will reduce the budget deficit caused by the [economic] crisis and prevent some of the cutbacks that may have imposed on the public."

Finance Ministry officials faced a dilemma over the question: On the one hand, they need to raise more tax revenues; on the other, they want to encourage companies to invest by offering globally competitive corporate tax rates.

Not only Tax Authority officials objected to Steinitz's plans. Many MKs intend on fighting the changes. "The Finance Minister had finally proved he is the servant of the rich in Israel, so much so that he is willing to hide information from the public and change the rules of the game for these companies after the game has ended," said MK Zahava Gal-On (Meretz ).

"Steinitz is giving a retroactive reduction in corporate tax and an exemption from capital gains taxes to a small number of huge companies who hold NIS 120 billion in trapped profits in Israel. We will all pay the heavy price, already in the coming budget and for many years," she said.

The treasury is facing large revenues shortfalls both this year and next. The 2012 budget was based on optimistic assumptions that state revenue would come to NIS 232.2 billion this year. The ministry recently admitted that this assumption was mistaken and cut the projection to NIS 221 billion.

But now even that forecast appears optimistic and could result in a wider deficit. Next year's spending provisions are based on expected revenue in 2013, based on estimates made this month. It appears the shortfall in next year's revenues will amount to between NIS 10 billion and NIS 12 billion, and Steinitz hopes to cover this shortfall with the tax revenues from the multinational firms.