The Ofer family has pulled a lot of fast ones on the Israeli government over the years — when it bought control of the Zim shipping company from the state, in the negotiations to extend its franchise for Oil Refineries and in endless battles over Israel Chemicals.
The Israeli media have dubbed the family’s tactics the “shakshuka system,” after the extremely messy North African dish of eggs slowly poached on a peppery bed of tomato sauce with olive oil and spices and a 2008 documentary of the same name that exposed the Ofers’ modus operandi and the unholy ties between big business and politics.
This time, however, the shakshuka isn’t being cooked up by the Ofer family, but by the government. The Economy Ministry, headed by Shas party chairman Arye Dery, has written a position paper rejecting all of the government’s claims against ICL and the Ofers. If it is accepted, the entire vituperous debate in the Knesset over the recommendations of the Sheshinski II Committee on taxing the exploitation of Israel’s natural resources and over disqualifying ICL from aid under the Law for the Encouraging Capital Investment will be for naught.
“Position Paper on the Distinction Between Mining and Industrial Operations” is how the official title of the white paper issued by Economy Ministry Director General Amit Lang in July translates into English. Neither its title nor its mere seven pages gives away the explosive nature of the document, which rejects Israel’s entire policy on taxing the exploitation of natural resources in place since 2011.
Lang dismisses the state’s two main measures in the past few years to increase taxes on the state’s second-biggest natural resource (after natural gas) — the potash mined by the Dead Sea Works, a subsidiary of ICL. ICL is controlled by the Israel Corporation, which in turn is controlled by the Ofers.
The first was the 2011 decision to remove ICL from the protection of the Law for Encouraging Capital Investment. The second is the proposal by Sheshinski II to raise royalties and taxes on natural resources, starting with ICL’s potash.
The Sheshinski II recommendations are now being discussed in the Knesset Economic Affairs Committee, and ICL is fighting them with all its strength.
The company says that if the proposals are adopted, it will make no further investment in its Dead Sea facilities and will fire thousands of workers. The threats prompted the mayors of nearby communities as well as the trade unions representing ICL employees to come out in support of the company. The Prime Minister’s Office is also on board.
But all these allies are nothing compared to the Economy Ministry, which was so impressed by ICL’s claims it adopted most of them as official policy. This has major legal ramifications.
‘Mining’ vs. ‘industrial production’
The ministry’s own professional opinion concerns the legal distinction between the “mining” and the “industrial production” of minerals.” This distinction is critical because it determines ICL’s tax rate. The distinction was set back in 2011, when the Shani committee — its official name is The Committee on Increasing Competitiveness in the Economy — major changes to the Law for Encouraging Capital Investment. They included not extending the law’s tax benefits to companies that cannot leave Israel for a different country, where taxes are lower. These includes government enterprises and companies that mine natural resources. The committee sought to correct a historic injustice, in which ICL was one of Israel’s most profitable companies but paid the lowest taxes as a result of the benefits it received under the law.
But the Shani committee chose to rescind the tax breaks only on those parts of ICL’s operations that could not be transferred out of Israel, namely mining and mineral extraction. Downstream operations, which could be done anywhere, were designated an industrial process still entitled to the tax breaks.
As a result, the full 25% corporate tax rate was imposed on mining and mineral extraction while downstream operations remained subject to a rate of just 9%. That wasn’t good news at all for ICL, because the Shani committee determined that most ICL Israel operations constituted mining and extracting the potash and subject to the higher tax rate.
Instead, ICL has been claiming that potash extraction is, in fact, an industrial activity, meaning that the vast majority of its domestic operations are still covered by the Capital Investments Law.
Fearing the wording of the Capital Investments Law wasn’t precise enough, the Israel Tax Authority allowed ICL to go to court over the matter. At this stage the Tax Authority asked for a legal clarification, which was supposed to be part of the Sheshinski II committee’s work on taxing natural resources in general, not just potash.
In the end, the committee decided to levy a tax surcharge of 42% on ICL’s windfall profits on potash based on the assumption that all the profits from potash would be taxed at the full 25% corporate tax rate and the windfall profits surcharge added on top of this. The Sheshinski committee also decided to only tax mining and extraction operations at these rates, not industrial ones. After the Tax Authority said the distinction between the two forms of operations was not clear enough, the committee explicitly stipulated that mining and extraction would comprise all activities until the “first tradable product,” a phrasing that would also be incorporated in an amended Capital Investments Law. This would mean the entire potash plant would lose all its tax break and be taxed at the full 25% rate.
The Economy Ministry, it should be noted, was a full partner in the Shani and Sheshinski II hearings, where at no stage did it ever express any reservations.
This was true until July, when the government learned for the first time that the ministry actually thought the authority to determine this distinction between mining and extraction and industrial operations belonged to it, not the Tax Authority. Furthermore, it said, using its authority the Economy Ministry thought ICL’s potash plant should continue to enjoy the reduced tax rate of only 9%. Lang announced that his ministry objected to amending the Capital Investments Law to make ICL liable for the full tax rate. This, in one fell swoop the entire foundation of Israel’s new tax policies over the past four years concerning ICL collapsed.
The ministry decided that only the mining of carnallite, a mineral that is the basic raw material in ICL’s Dead Sea evaporation pools, is to be considered the “mining” part of the operation. Everything else would be considered industrial production, in line with ICL’s position.
If Lang’s opinion is accepted, it is expected to cost the state an estimated 300 million shekels ($78.3 million) a year in lost tax revenues. So, it is now clear too that the law must be amended to clarify this situation, otherwise ICL can go to court with Lang’s opinion in hand and claim the ministry that oversees its operations agrees with its position, so what right does the government have to ask for higher taxes? This is exactly why the debates in the Economic Affairs Committee on the issue are so fierce.
In summary, four years after losing the battle over the Capital Investments Law, and a year after losing its fight over the Sheshinski II recommendations, ICL now seems to have the upper hand in its campaign to pay less tax.