Money Before Principles

The Finance Ministry wants to cut a deal with some of the world's largest corporations, but it hasn't bothered to calculate how much money the state would lose in the process.

The Israel Tax Authority, we learned this week, is pressuring Finance Minister Yuval Steinitz to compromise with some of the world’s largest corporations: Intel, Teva, Amdocs, Check Point and others − and allow them to withdraw enormous dividends of NIS 100 billion − and pay very low tax rates on the money.

These tax breaks would violate the rules of the Encouragement of Capital Investment Law, in which all these companies received big breaks on corporate taxes on the condition they pay full tax on these dividends.

We asked the Finance Ministry Tuesday what is the total amount of the tax break involved − or in other words, how much of this potential tax revenue is the state giving up on in reaching a compromise with these multinational firms. We did not receive an answer, because it seems the treasury has not even calculated how much it would cost.

Steinitz and the ITA have only worried themselves so far about a different question: How much money could the state take in already this year if they sign the compromise. Estimates are the treasury could take in the huge windfall of NIS 15 billion. But they have not bothered to examine the price of this compromise: How many billions in taxes is the state giving up?

This is one reason why there is such a furious dispute within the Finance Ministry. The other reason is that the ministry debated just such a compromise exactly a year ago. The debate was part of the discussion of the changes in the Capital Investment Law by a committee established to make such changes.

The committee decided to make changes in the law and allow companies to enjoy tax breaks also when distributing dividends − but these changes only took effect this year. But at the same time as the committee recommended changing the law, it also clearly decided not to make the changes in taxes on dividends retroactive − and not to include the NIS 100 billion these firms have racked up so far from their investments in Israel.

The committee’s explanation was that you don’t change the rules retroactively: Whoever invested under the original terms of the law in the past before the changes, knew they were getting lower taxes now for the price of higher taxes on dividends in the future. The committee decided that it was inappropriate that when the time came for the companies to pay up, they would pressure the state to change the rules in their favor − and retroactively.

The committee on changing the capital investments law decided that principles were more important than money. It was more important for the state to stand on principle than to rake in a one-time windfall in taxes. But exactly a year has passed and the senior ranks of the Finance Ministry, led by the minister himself, have changed their minds. Principles, it seems, are quite fluid when immediate revenues of NIS 15 billion are at stake.

Of course, the entire Encouragement of Capital Investment Law is rather fluid. The law was changed a year ago after it turned out that it did not attain its goals of encouraging investment or employment, especially in the periphery. The law was changed after realizing that the only thing the law achieved was handing out money to the large exporters: Out of NIS 5.6 billion in tax breaks the law provided in 2006, 72% of the money went directly into the pockets of the five largest exporters. Most of the money went to Teva, Israel Chemicals and Iscar, it seems.

In the end, these companies’ tax breaks were 2.2 times the amount they paid the state in taxes. Since these companies really don’t need the tax breaks, it turns out that the state basically turned over NIS 4 billion to the owners of these five companies − at the expense of the taxpayer.