In the Money

State and Israel Chemicals Caught in a Trap Over ICL's Future Taxes

ICL may have agreed to pay the state NIS 380 million on Sunday for its 'trapped profits,' but both sides are still taking the other's words with a large pinch of salt.

Israel Chemicals agreed Sunday to pay NIS 380 million in taxes on its so-called trapped profits. In so doing, ICL's board showed its sensitivity to the company's image by responding to public demands that it meet its moral obligation to the state with a large tax payment.

But the board's sensitivity over trapped profits came just two days after Israel Chemicals issued a clear threat, saying it would consider dragging the state into international arbitration if it doesn't exempt the company from the discussions being conducted by the Sheshinski II Committee on increasing the government's share in the country's natural resources.

Does this represent a contradiction in ICL's approach? Not when taking into account that the tax on trapped profits is small change compared to what’s at stake in the Sheshinski II hearings, and the history that led up to the panel's formation.

ICL's blunt threat, which clearly rips off its mask of public sensitivity, isn't completely baseless. In fact, the state admits a certain justification for ICL's outrage, although it has no intention of knuckling under to the threats.

The dispute is centered on the words "at this point in time." In an agreement between the state and Israel Chemicals signed in December 2011, the company committed itself to funding the Dead Sea salt-dredging project, at an estimated cost of NIS 3 billion to NIS 4 billion. The purpose of the project is to prevent the rising water level of the company's evaporation ponds - due to the accumulation of salt sediment - from flooding the hotels along the southern shoreline. Israel Chemicals also agreed to increase the rate for royalties paid for extracting potash from the Dead Sea. In exchange, the state promised that its claims against the company had concluded "at this point in time."

Israel Chemicals and the state don't dispute why the phrase was put into the agreement, since it was clear to all that the state aims to continue increasing its share in the company's revenues. Israel Chemicals now claims it accepted the salt-dredging agreement because the state threatened it with having the Sheshinski II Committee examine the state's share in the company's profits and determine if it's reasonable (as previously done with the gas exploration companies). Israel Chemicals claims it agreed to pay more, on condition that the state would stop hounding it for the next several years.

The state doesn't deny that its agreement with Israel Chemicals was made under the shadow of threatening to establish the Sheshinski II Committee. But the state insists that at no stage did it promise the company that such a committee wouldn't be formed in the next few years in exchange for signing the agreement, and therefore the vague wording "at this point in time" was used in the agreement without specifying any specific date.

Less than two years have passed since the agreement was signed. Meanwhile, the government established the Sheshinski II Committee, which includes, within its mandate, the examination of the government's take from ICL profits. Even if this isn't in clear violation of the state's contractual promise to the company, it's hard to deny that it shows a lack of grace. The state also understands this.

When the agreement with Israel Chemicals was signed at the end of 2011, the Finance Ministry came under attack for appearing to surrender to the company. In response, the ministry flaunted figures showing the state's share in ICL profits reaching 55% following the agreement and ICL's inclusion in the Encouragement of Capital Investments Law several months before.

It took less than a day for TheMarker to reveal that the treasury made some crude mistakes in calculating its share of ICL's profits. After correcting for errors, it transpired - to the treasury's embarrassment - that the state's part in the company's profits could be crudely estimated at just 25% to 33%.

In effect, the Finance Ministry admitted to the government that it doesn't know what the state's share in ICL profits is, and probably won’t be capable of performing a precise calculation until 2017, due to the many open disputes between the sides.

First, the tax authority hasn't yet established what the company's new tax rate will be. The rate will vary between 16% and 26%, since some of ICL's activities are still subject to benefits from the Encouragement of Capital Investments Law. Moreover, the method of implementing the formula for royalties paid by ICL to the state is under arbitration. The exact cost of the salt-dredging project also isn't entirely clear.

This vast uncertainty means the state can't determine what its take will be from ICL's profits over the next few years. And if it doesn't know how to calculate its share in the profits today, how can the Sheshinski II Committee hold discussions about changing it?

This raises questions both about the state's honesty toward the company with which it signed an agreement just a year and half earlier, and about the reasonability of the committee's deliberations considering the lack of information needed for conducting informed discussions.

The state is aware of the dual criticism, and isn't rejecting it outright. In fact, even before the Sheshinski II Committee discussions have begun, it seems quite clear that the state will avoid changing ICL's tax regime for several years to come, in order to avoid the appearance that its signature on agreements is worthless. The solution taking shape is that the committee will decide what tax regime should apply to Israel Chemicals and delay its implementation until 2017, when all the numbers become clear and the company will no longer be able to claim victimization.

However, the state insists on carrying out discussions on a suitable tax regime right now - even though the change will only apply in the future - because the committee has already been established and because it questions the purity of ICL's intentions.

Although the state surprised Israel Chemicals a year and a half after signing the agreement, Israel Chemicals also surprised the state when it announced its intentions of handing over control to Canada's Potash Corporation of Saskatchewan last spring. The transfer of control has been put aside for now but if the issue emerges again, the state wants to come prepared with decisions on ICL's suitable tax regime, before the company is potentially put into powerful, foreign hands such as Canada's potash company. In other words, there isn't really the time to put discussions on ICL's tax regime on hold.

Ofer Vaknin