Israel May Let Gas Companies Postpone Royalty Payments

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The Tamar gas field in the Mediterranean Sea, September 2, 2015.
The Tamar gas field in the Mediterranean Sea, September 2, 2015.Credit: Tomer Appelbaum

The Knesset voted in 2014 to establish the Israeli Citizens’ Fund as the country’s sovereign wealth fund, but the state has yet to collect the $1 billion in tax revenue from the natural gas companies needed to launch it.

In early January, Finance Minister Yisrael Katz and Tourism Minister Orit Farkash-Hacohen proposed an amendment to the 2011 Profits from Natural Resources Law that would accelerate the launch of the fund. However, some of the provisions are liable to significantly delay the collection of taxes from the companies that are required to contribute to it.

The amendment’s stated purpose is to settle a number of issues in connection to the supervision and collection of the super-profit tax imposed on the gas companies, adding that the changes are expected to allow the fund to begin operating sooner and to increase the revenue in the fund.

‘Violation of public trust’

Some of the proposals are positive and would hasten the collection process. They also increase the state’s enforcement capabilities in the event the companies don’t file reports on time or include false information in their reports. However, other amendments open other breaches that are liable to hurt the sovereign wealth fund.

Lobby 99, a nonprofit organization whose stated objective is to promote the public interests in the government and in the legislature, sent a letter to the Israel Tax Authority in which it argued that while some of the proposed changes are welcome, others could open loopholes that would lead to a delay of four years or more in paying into the fund. “Amending the law is of great public importance, considering that the legislators’ intentions have yet to be fulfilled since the Profits from National Resources Law was passed – increasing the public’s share in natural resources,” the advocacy group wrote.

Continuing, Lobby 99 added: “The failure to collect windfall profits – based on collection forecasts that didn’t come true as well as the marginal amounts collected during the decade since the law was passed – plays a significant role in damaging public faith in the tax authorities and in government institutions in general. Therefore, we call upon you to enact significant changes through amendments that will increase transparency for the public and certainty that the tax will indeed be collected from gas and exploration companies, who have earned billions and billions of shekels so far from the natural treasures that belong to the public.”

More need for transparency

Currently, oil and gas companies are required to submit a preliminary excise report within four months of the end of the tax year. They have to detail in this report “the gas enterprise’s financial data, including a report on the financial situation, profit or loss, a report on changes in equity capital, a report on cash flows as well as explanations.”

The logo for Chevron appears above a trading post on the floor of the New York Stock Exchange, October 8, 2019.Credit: AP Photo/Richard Drew

After submitting the report, an income tax assessor must publish within a year the amounts that company is to pay to the state to benefit the sovereign wealth fund. Afterward, the company has 30 days to appeal the decision. A second tax assessor has six months at the most to deliberate and issue a decision, which can also be appealed.

The one-year limit on the first decision of the tax assessor is part of the original law, which differs from the standard tax law, as well as the limit on deliberating on the objections. However, Lobby 99 wrote the tax authority that the new memorandum cancels this limit and refers to the standard limits set by the tax law of four years.

The draft amendment does not explain why the deadline for the assessment was set back.

The preamble to the draft amendment does state: “Resources of the tax authority are limited, and investing the operational resources needed to conduct assessments regarding the natural resources excise, without improving the tools of enforcement, is inefficient. This is true all the more so in this period, in which many resources are being dedicated for the need of helping businesses during the coronavirus pandemic. The proposed amendment will reduce inefficiency in the collection apparatus.”

However, representatives of Lobby 99 say the change will lead to a dramatic delay in payments made to the sovereign fund. “As much as the goal of the amendment is to advance the deposit of funds, the proposed amendments are liable to delay the end of the assessment processes and thereby the deposit of the excise taxes for up to an additional three and a half years, and therefore they contradict the amendment’s declared goal,” the nonprofit organization stated.

“Thus, for example, pursuant to the main law today, payment of the excise profits that are not disputed for 2020 regarding the companies’ obligations is liable to be postponed until December 2022. After the amendment, the amount of time it will take to pay the entire excise, including the disputed amount, is liable to be drawn out until May 2026.”

Holding funds hostage

Lobby 99’s letter asserts that there is no justification for extending the amount of time given to tax assessors on this issue. The authors wrote: “We assume that the tax authority will claim that the additional time will enable it to collect the real amount, given the additional time allotted for working and additional information. Still, we believe that the Natural Resource Law is unique and different in its substance from the tax directive and therefore demands different treatment.”

The Leviathan gas field, in 2019.Credit: Mark Israel Sellem

The lobby also asserted that extending the process will allow a fundamental examination of the companies’ reports, but also raises suspicions of a superfluous extension of the taxation process. Therefore, there is a need to impose an obligation of even greater transparency regarding the tax collection process.

Lobby 99 suggested that it would be possible to lengthen the taxation process by a year – and even that subject to a reasoned out approval by the tax authority director, who would be obliged to publicize his decision and to present it before the Knesset Finance Committee.

Another change in the law memorandum states that even if an appeal is filed with the court regarding the amount set by the assessor, the due date would not be postponed In other words, the companies would be required to pay the sums at the earliest date – and if the court would decide that the sum is too high, then the state would refund the company the amount plus interest.

This step would enable speeding up the collection process, but it raises other problems. Lobby 99 asserts that this clause is problematic because it is not clear whether the sovereign fund would be able to make use of the “disputed funds” that the state might have to return. In other words, it could create a situation in which the wealth fund would be forced to sell assets to return funds. So, it is proposed that returning the funds be done by offsetting future tax remittances. “It’s unacceptable that the fund’s money should become ‘hostage’ to legal proceedings run by the companies,” the organization wrote.

In a written response, the Israel Tax Authority commented: “The proposed amendments are meant to improve and make more efficient the assessment process and the collection system. Regarding excise refunds from the fund, officials are examining the matter.”

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