Companies Seek NIS 1 Billion Due to Investment Law Loophole

Law promises reduced tax for exporters - defined as firms selling to target markets with more than 12 million people. But the number wasn't updated when Israel and PA passed the mark.

Hundreds of companies that manufacture goods exclusively for Israel’s local market are trying to take advantage of a loophole in a law meant to encourage capital investments for exports.

These firms, including the cement monopoly Nesher, are seeking to receive tax credits worth a total of NIS 1 billion for 2011.

The Tax Authority intends to fight back, and the cases are likely to wind up in court.

The case stems from a clause in the law for encouraging capital investments that promises reduced corporate tax rates for companies that are determined to be exporters. The law defines exporters as companies selling to target markets that contain more than 12 million people.

When that clause was drafted in 2005, the intent was to define exporters as companies serving markets larger than Israel’s market.

But the Tax Authority forgot to update that number, overlooking the fact that the market in Israel and the Palestinian Authority passed the 12-million mark in 2011 and 2012. Hundreds of local companies obtained population estimates stating that the mark was reached in 2011, ostensibly making them eligible to benefit from the law encouraging exporters and giving them a discount off the 24% corporate tax rate effective in 2011.

The Tax Authority obtained a population estimate stating that the line was crossed only in 2012.

The taxman is likely to have to settle the issue in court, with the court deciding which population estimate is more accurate.

However, the taxman also has the intent of the law on its side – it is expected to tell the court that all parties involved know that the law is intended to encourage exports, and the companies’ interpretation of the law goes against its spirit.

The loophole was fixed when the Knesset approved an amendment this June, increasing the figure to 14 million effective for 2012, and including an automatic updating mechanism increasing the figure by 1.4% every year, in keeping with estimates for global population growth.

The Knesset would have liked to make the change retroactive to 2011 as well, but the Justice Ministry refused to approve this.

Tal Cohen