Israel Raises $1.24 Billion in Taxes on 'Trapped Profits’

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The government has collected NIS 4.37 billion ($1.24 billion) in taxes from so-called trapped corporate profits, well above expectations, the Tax Authority reported Tuesday, saying it now expected companies that enjoyed the low tax rates to invest more than NIS 1.8 billion in new plants and equipment over the next five years.

The government's windfall came as a huge number of companies opted to pay the tax in the hours before the window closed midnight Monday into Tuesday on a program entitling firms to big tax discounts. One of the last to file was Check Point Software Technologies, the computer network security company, which notified the Tax Authority of its decision at 11:45 P.M. Monday to pay NIS 520 million.

That made Check Point the second-largest taxpayer of some 210 companies in the program, among them toolmaker Iscar, controlled by U.S. investor Warren Buffett.

In the end, NIS 2.92 billion came from just three companies. Teva Pharmaceutical Industries paid NIS 2 billion, including NIS 1.6 billion it filed to pay on Monday, while Israel Chemicals paid NIS 400 million. The rest of the revenue was collected from 205 companies, with the average tax rate between 6% and 10%.

Trapped profits are earnings that companies accumulated under the Law for Encouraging Capital Investments Law, which entitled them to tax exemptions on profits designated for reinvestment in Israel. Companies accumulated as much as NIS 130 billion in retained earnings that were neither reinvested nor paid out as dividends, which prompted the government this year to offer them discounts of up to 60% on the ordinary tax rate if they acted. The treasury had expected to bring in some NIS 3 billion under the program.

Tax officials defended the big discount, noting that the 6%-10% rate was not significantly lower than the 9%-16% under the amended Law for Encouraging Capital Investments.

Tax Authority officials said Tuesday that the tax breaks also required companies to make new investments, and given the extent of taxes paid, this would amount to NIS 1.8 billion in the next five years by the biggest companies alone. Of that, Teva is committed to capital spending of NIS 760 million. Smaller companies have investment commitments that will increase the total.

Under the law, companies can investment in plants and equipment (but not real estate), in research and development, and for salaries paid to newly higher workers, although not managers.

In Teva’s case, it’s not clear how its NIS 760 million commitment will be spent after the company announced last month it was laying off hundreds of employees in Israel as part of a global cost-cutting drive.

An Israel Chemicals plant on the Dead Sea. Lots of magnesium and lots of trapped profits. Credit: Reuters

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