Lapid Orders Higher Tax Rates for Israeli Companies Enjoying Benefits

The new rate on companies that export at least a quarter of their output will go up to 15% from 12.5% for those located in the center of the country.

Companies enjoying tax benefits under the Law for Encouraging Capital Investments will face higher rates this year, Finance Minister Yair Lapid said yesterday, in the wake of a damning report by his own ministry on how little in taxes some of the country’s biggest companies paid.

The new rate on companies that export at least a quarter of their output will go up to 15% from 12.5% for those located in the center of the country. For companies meeting the same benchmark located in the periphery, the rate will rise to 10% from 7%.

That means the rates will be returned to what they were in 2011-2012 before they came down this year. Lapid said the tax rates needed to be increased to help cope with a yawning deficit for 2013-14 budget.

The announcement of the planned tax hike, which Lapid made at a meeting of his Yesh Atid party, came a day after he won cabinet approval to increase the deficit to 4.65% of gross domestic product from an originally planned 3%, a move that will help ease the need for spending cuts and tax hikes but not eliminate it.

“I have asked for legal advice about what we have to do with the law,” Lapid said. “I will enter into a dialogue with the companies that live here among us and the people who work for them and get salaries. We will try to see whether we can get their agreement to change the rules of the game.”

The new tax rates will be written into the Economic Arrangements Law − the legislation that accompanies the budget and implements the fiscal goals it has set.

Under the terms of the Law for Encouraging Capital Investment, which was amended in 2011, companies that export 25% of their output enjoy reduced tax rates on all their earnings. Other companies pay a 25% rate.

The law was designed to attract foreign investors and increase the country’s merchandise exports. But it marked a radical change from the previous version of the law, which had only granted tax benefits on business generated from new investments.

Officially, industrialists praised the amended law, saying that in terms of taxation, it made Israel one the best countries in which to engage in manufacturing. But privately, executives at the companies enjoying the lower rates said it didn’t make any sense.

“There’s no reason to give my company government benefits, but I would have to be an idiot not to take the subsidy that the government is giving me,” the chief financial officer of one beneficiary company told TheMarker, on condition of anonymity.

But public criticism was also mounting, including a report published this week by the treasury’s own State Revenue Administration, that finally forced the Finance Ministry to act. The report found that four giant companies − Teva Pharmaceuticals, Israel Chemicals, Intel and Check Point Software − enjoyed $4 billion in tax benefits in 2012, accounting for the lion’s share of the $5.6 billion awarded that year.

Now the treasury wants a more widespread distribution of the tax benefits. Under the 2011 amendment to the law, the tax on export companies was supposed to decline gradually: In 2011-2012, companies in the center of the country were supposed to pay a 15% rate and those on the periphery 10%. In 2013-14, the rates fell to 12.5% and 7%, respectively and in 2015 another notch to 12% and 6%.

The biggest, so-called “strategic” companies would enjoy an even lower rate of 8% in the center of the country and just 5% in the periphery. According to the opening chapters of the report by the State Revenue Commission, four companies received 70% of all tax benefits to industry, said Lapid. “They paid an effective tax rate of 3.3% at a time when every shoe store was paying tax in their place. I’m angry. This wasn’t an amendment that was legislated with any thought.”

Nissan Slomiansky ‏(Habayit Hayehudi‏), chairman of the Knesset Finance Committee, said the panel would hold a debate on the report.

“They are raising the value-added tax on the public right now instead of increasing taxes on big companies,” he said.

Ofer Vaknin
Moti Milrod