Israel in 11th Hour Bid to Get NIS 2 Billion in 'Trapped Profit' Taxes From Major Firms

It is estimated that various firms have accumulated NIS 120 billion in accumulated profits that are the product of a law that encouraged firms to invest in Israel and defer payment of taxes in the process.

The Tax Authority at the Finance Ministry is making supreme efforts to convince three major Israeli companies to pay taxes on their so-called "trapped profits" — accumulated profits that are the product of a law that encouraged firms to invest in Israel and defer payment of taxes in the process.

The issue involves the potential injection of billions of shekels of tax revenue into the state's coffers. The three companies are Teva Pharmaceutical Industries; Internet security firm Check Point Software Technologies; and Israel Chemicals.

One provision of the Encouragement of Capital Investments Law expires tomorrow, and the Tax Authority is hoping that the three companies will agree to pay a cumulative NIS 2 billion on their trapped profits. In the process, the authority would achieve its NIS 3 billion budgetary target for tax payments on trapped profits. So far this year, the state's tax take from this source has been about NIS 1 billion.

It is estimated that various firms have accumulated NIS 120 billion in trapped profits here — sums that have not been distributed as dividends and on which taxes have not yet been paid. The law was designed to encourage investment here, but in many instances it didn't work that way. The law granted tax exemptions to companies setting up plants in Israel, but required them to pay tax if they paid a dividend from profits. Many of these companies, therefore, have not paid dividends. The significance of tomorrow's deadline is that firms have until November 11 to benefit from a reduced tax rate on accumulated exempt profits from before 2012. The final tax rate depends upon the portion of these profits that the company reinvests in Israel.

Since the state budget is based on an assumption that NIS 3 billion in trapped-profits taxes would be paid to the state this year, if the government does not manage to bring in the funds, it would create a NIS 2 billion hole that could increase budgetary pressures. The Tax Authority has been pressing ahead with intensive talks with the three companies, as well as several smaller firms, in an effort to convince them to come up with the tax payments now.

The failure of the effort so far is seen as surprising, coming against the backdrop of public anger over the effects of the capital investments law. The major firms benefitting from the law have been taken to task publicly for what is seen as an unreasonably generous tax break handed to them. The tax officials are trying to convince the companies to view the payment as a way to demonstrate their commitment to Israeli society. It's not clear if the lack of a breakthrough so far was the result of cash-flow problems that the companies may be having, or whether they prefer to press a legal case that they are not obligated to pay the funds.

Based on all indications, the core of the problem appears to be cash flow-related. The amounts of the tax payments are not inconsiderable, even for giant corporations. On the other hand, if they pay now they would benefit from a tax break.

Another possible consideration is that of corporate image, particularly for Teva, in light of public anger over the corporate benefits from the Encouragement of Capital Investments Law.

In other Teva-related developments, an 18-day strike by 1,100 unionized workers at its Teva Tech plant at Neot Hovav in the south was settled Friday. The workers will be getting a 6.25% annual pay raise for five years, along with other benefits. Workers who had been earning minimum wage will get an additional bonus.

The plant makes raw ingredients for Copaxone, Teva's flagship multiple sclerosis drug. And in news related to future competition for Copaxone, U.S. regulatory officials are raising concerns about "potentially fatal safety issues" in patients given drugmaker Sanofi's new multiple sclerosis drug, Lemtrada, fueling uncertainty about whether Sanofi's drug will be approved for use in the United States.

With reporting by Haim Bior and Reuters.

Eliyahu Herskowitz