Israel's Treasury Mulls Cutting Tax Breaks for Exporters

Turnaround follows public fury over Teva Pharmaceutical Industries paying just 0.3% rate on $1.66 billion in profits.

Fury erupted over the revelation last week that Teva Pharmaceutical Industries paid taxes to the state in 2012 amounting to just 0.3% of its $1.66 billion in profits, thanks mostly to benefits under the Encouragement of Capital Investments Law. The Finance Ministry is now said to be considering reducing exemptions granted under the law and raising the applicable rates.

While most companies pay 25% tax on earnings and dividend distributions, those that export more than a quarter of their output enjoy special breaks. The original version of the law is not only generous it included a controversial 0% rate for global companies, which also applies to Teva.

Under a 2011 amendment, exporting companies located in the central region are subject to a 12% corporate tax rate, while those in outlying regions are assessed 6%. Global companies enjoy a special rate of only 5%, and all are subject to just 15% tax on dividend distributions, according to the new version of the law. However, it will likely take eight to ten years before the old rates expire based on previous agreements between the multinationals and the government.

Corporate tax savings bestowed by the law, one of the greatest sources of tax exemptions granted by the state, amount to over NIS 5.8 billion a year. It is also a regressive tax benefit. About NIS 4.1 billion – 72% of the total – is enjoyed by a handful of Israel's largest exporters which in all likelihood includes Teva, Iscar, Check Point, Israel Chemicals and Amdocs.

The distorted picture emerging from the figures has long been a target of sharp public criticism. The government, however, claims the country has no choice but to compete for large exporters that would enjoy immense tax benefits anywhere in the world and could transfer their operations at the drop of a hat. The Finance Ministry also claims that the new 2011 law will solve the problem once it begins taking effect.

Even so, rates under the new law remain very low relative to the rest of the world. And with the public uproar over the law, the treasury is now contemplating cutting back on the benefits bestowed.

Raising the rate on dividend distributions from 15% to 20% is the only change enjoying broad support in the treasury at this stage in the hope that its announcement will encourage companies to move forward with distributions at the reduced rate this year and generate a windfall of taxes from trapped profits.

Other changes under consideration include increasing the tax rates to 15% for exporters based in the center and 10% in the periphery, with tax on multinationals going up to 8% or 9%. These changes, however, wouldn't have any real impact for years to come, one reason the treasury might feel safe in considering them now.

Bloomberg