Treasury Unlikely to Go After NIS 62b Untapped Corporate 'Trapped Profits’

The window for companies to pay a reduced tax rate on their so-called “trapped” profits expired November 11, with some 214 companies offering to pay on some NIS 60 billion in profits. It produced a windfall of tax revenues for the treasury.

• Tax Authority celebrating what was really a disaster
• Israel's treasury grapples with unusual problem: Excess revenue
• Scheduled tax hike reversed as PM says economy is in 'pretty good' shape

But another NIS 62 billion in trapped profits remains on corporate books. The figure is in fact higher, as the Finance Ministry hasn’t yet published how much more in profits were accumulated over 2012 and 2013.

Officials at the treasury and the Tax Authority are still resting on their laurels from the windfall and haven’t begun considering what to do about the remaining trapped profits. They are unlikely to take up the matter until next year.

“Big companies paid the tax and released their trapped profits in accordance with their needs, so it is hard to believe that they would participate in another [tax break] window anytime in the near future,” the Tax Authority told TheMarker in a statement.

The treasury said it didn’t believe the public was interested in another program for trapped profits.

Trapped profits are earnings accumulated by companies qualified under the Law for Encouraging Capital Investments, which entitled them to tax exemptions on profits designated for reinvestment in Israel. So long as the profits were not paid out as dividends, they were liable to no tax at all.

As of the end of 2011, they had piled up to NIS 122 billion in profits.

In a bid to get ahold of some of those profits as taxes, a year ago the treasury offered companies that would pay out the profits as dividends a major tax break. Companies that agreed to release all their trapped profits would pay a rate of between 6% and 10%. Those chose to release only a portion of the profits would pay 17.5%.

Over the next year, few companies took advantage of the offer, prompting treasury and Tax Authority officials to mount an 11th-hour campaign to convince them to act.

On the final day of the program, about 40 companies filed for tax relief, bringing the total take for the final day to NIS 3.271 billion. That was equal to 72% of the total for the program and more than the NIS 3 billion the treasury predicted would be paid altogether

Check Point Software was the last company to take advantage of the window offered by the government, filing just before the midnight deadline. It paid NIS 512 million in taxes, making it one of the biggest contributors to the NIS 4.387 billion the treasury collected in the program. Seven companies accounted for 87% of the tax liabilities due.

Treasury officials pointed out that because the old Law for Encouraging Capital Investments is due to expire in two years. “It’s hard to believe that the total amount of trapped profits will increase significantly by the end of 2015,” the ministry statement noted.

The taxes collected from the trapped profits tax program helped produce a surprise budget windfall for this year – a product of higher-than-expected tax collections and lower-than-projected spending by ministries. The tax-break window was originally conceived when the fiscal situation looked dire as a way of squeezing out some extra tax revenues.

Finance Minister Yair Lapid is so optimistic about 2014’s fiscal picture that earlier this week he rescinded plans to raise personal income tax rates in January.

When the Finance Ministry begins discussing what to do with the trapped profits, officials could opt to let the companies amass profits as much as they like and insist that they pay ordinary tax rates the day they decide to release them. That would include corporate income tax and the dividend tax.

Or officials could opt for another window, which could yield the government some NIS 4 billion to NIS 5 billion. The fact that wealthy and profitable companies, including many of Israel’s biggest businesses, got to pay such low tax rates, however, sparked much public criticism.