Despite fierce opposition in the Knesset, and even within his own ministry, Finance Minister Yuval Steinitz has decided to grant a huge tax break to large multinational companies operating in Israel.
If he gets his way, the companies would receive reductions of 40% to 70% on corporate taxes on so-called "restricted profits," which are profits the firms have earned in Israel that must remain here, unless they pay higher taxes on the money.
The Israel Tax Authority will offer the reduced taxes if the money is paid by the end of 2013 and if it is invested in Israel, according to the bill the ITA published on Monday. The tax authority says the proposed law will "aid the Israeli economy at this time."
The treasury wants to use the money next year, to cover a shortfall in tax revenues, as well as the budget deficit.
The tax debate relates to multinationals like Intel, Teva and Israel Chemicals that have accepted state aid under the Encouragement of Capital 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 pay 10% corporate income tax. If they opt to repatriate the profit overseas as dividends, they are required to pay another 15%, bringing the total tax due to 25%. But Steinitz's order would change all this.
The total value of the trapped profits is estimated by the treasury to be some NIS 120 billion. But the Finance Ministry does not believe many companies will take advantage of the offer, and expects to see only NIS 1 billion to NIS 3 billion from the offer.
If the corporate and dividend taxes were paid in full, without any tax breaks, the revenues would amount to more than NIS 20 billion.
The tax reduction would be based on the proportion of the frozen profits the company wants to free up - the larger the percentage of the total profits, the lower the tax rate. The minimum tax break would be 40% off, while the maximum would be a 70% reduction in corporate tax owed. But the tax breaks would be dependent on the company investing money in Israel, either through an existing factory, research and development activities or by hiring new workers.
In the past, Steinitz conditioned tax reductions on the companies reaching an agreement with the Israel Tax Authority to settle 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 bill would make it much easier for the companies to close their cases, and save huge amounts of money.
Steinitz wants to change the tax rules via emergency order, even though his own ministry's budget division and the accountant general oppose the plan. In order for the bill to be passed as such, it will have to be approved by the cabinet and then by the full Knesset. It is unlikely this will happen before the Knesset recesses for the summer at the end of July.
MK Zahava Gal-On (Meretz ), a member of the Knesset Finance Committee, called the proposed law a reckless gift worth at least NIS 10 billion to a few giant companies at the public's expense.
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