Israel Chemicals Reacts Badly as Panel Unveils New Plan for Natural Resources Tax

Sheshinski committee recommends progressive tax on profits, but ICL rails at 'highest tax burden' on planet.

Reuters

The government’s Sheshinski panel pulled back from some of the most severe proposals it previously made in an interim report on how to tax companies exploiting Israel’s natural resources on Monday. But the proposals failed to assuage Israel Chemicals (ICL), the company that will be most affected.

In a report issued with its final recommendations, the panel proposed sharply raising taxes on companies using natural resources. But it softened the blow by recommending a progressive, rather than flat, rate, ranging from 25% to 42%.

The committee recommended a tax rate of 25% after companies such as ICL reach an annual return on investment of 14%. That would rise to 42% for a return above 20%.

In its interim report issued in May, the panel – headed by Prof. Eytan Sheshinski, a former economics professor at Hebrew University and a critic of the government’s natural resources policies – had recommended a flat 42% tax rate.

Companies would also pay the government a uniform royalty rate of 5% of their revenue, versus the current range of 2% to 10%.

All told, the government would take between 46% and 55% of profits accruing to ICL and other natural resource companies – starting in 2017, when ICL completes a major investment program. That is up from about 23% today.

It would amount to an additional 400 million shekels ($107 million) of taxes for all natural resource companies (though mainly ICL) – 100 million shekels less than under the interim proposals.

The Sheshinski panel didn’t deal with Israel’s other great natural resource – offshore gas and oil reserves. Another committee in 2011 raised taxation on oil and gas companies, after two huge natural gas finds off Israel’s Mediterranean coast.

ICL mines minerals – chiefly potash, potassium and magnesium – from the Dead Sea and Negev Desert.

The company launched a scathing attack on the report. “The committee’s conclusions impose on ICL’s operations in Israel the highest tax burden in the world, substantially more than any other country on the globe that engages in the production of potash, phosphate and bromine natural resources,” the company said, saying it saw few material differences between the interim and final recommendations.

ICL has said it would cancel planned investments worth 2.5 billion shekels, reevaluate another 3.5 billion shekels in investments, divert investment to other parts of the world, close its magnesium plant, and accelerate the implementation of efficiency plans at its plants in the Negev.

ICL warned Finance Minister Yair Lapid that adopting the Sheshinski recommendations would make him responsible for “unemployment as well as social and human upheaval in the Negev, and the severe blow to industry in the Negev and to the economy that will result.”

But Lapid signaled that he would support the committee’s proposals. “I’m aware of the attempts to intimidate and threaten the closure of factories and layoffs,” he said.

“There’s no reason to fire a single worker. I suggest [that ICL] adjust its tone. Citizens have a right to enjoy the fruits of the country’s natural resources, not just senior executives and capitalists.”

The Tel Aviv Stock Exchange also didn’t seem to share ICL’s concerns about the recommendations and their impact on the company going forward.

ICL shares closed up 1.9% at 26 shekels, although the positive reaction may have a lot to do with the fact that the company’s stock has fallen 46% since the start of 2013, partly due to the threat of higher taxes.

“We believe that before the final [panel] approval, there will certainly be an additional easing of one kind or another of the terms, especially given the opposition by the economy and infrastructure ministries,” said Amir Adar, an analyst at the Meitav Dash investment house.

Adar was referring to the fact that some of the committee’s 14 members expressed reservations about the final recommendations, including treasury accountant general Michal Abadi-Boiangiu; Amit Lang, director general of the Economy Ministry; and Orna Hozman-Bechor, director general of the National Infrastructure Ministry.

Nevertheless, Abadi-Boiangiu termed the final report balanced and positive for ICL, which had revenue of $6.2 billion in 2013 and adjusted net profit of $1 billion.

Adar rated ICL shares a Buy, despite problems the company faces in its key potash market, and assigned its shares a target price of 34 shekels.

ICL, which last month listed its shares in New York, is 14%-owned by the Potash Corporation of Saskatchewan. Idan Ofer is its controlling shareholder through his holding company, The Israel Corporation.

MK Nissan Slomiansky (Habayit Hayehudi), chairman of the Knesset Finance Committee, also discounted what he termed ICL’s threats. “There is no reason to fear ICL’s threats. The company profits handsomely and pays out generous dividends. We have no reason to worry it will leave, and if it does I have no doubt that many companies would gladly take its place,” he said.

Among its recommendations, the committee included forming a new panel that would discuss the expiry of ICL’s license in 2030. Committee members believe that much of the company’s concerns related to the uncertainty surrounding that issue.