Steinitz Expects NIS 8-9b From 'Trapped Profits' Law

Knesset approves raft of legislation, including supervision over executive pay, water company dividends, in special session.

The Knesset met on Monday in a special session to finish off a number of legislative issues - many of which have important economic implications - before the January elections.

One of the major pieces of legislation pushed by Finance Minister Yuval Steinitz, and passed by the Knesset yesterday in its second and third readings, was the bill that would free "trapped profits" in exchange for a modest tax bite.

The law is designed to help large multinational corporations send home profits made in Israel but "trapped" here by the 25% tax on expatriating such money for use outside Israel. The new law will tax these profits of huge businesses at rates 40% to 70% lower than what they would have paid otherwise.

The rate on dividends for these companies will now be 6% to 17%, based on the proportion of these funds the companies are willing to invest in Israel and not take overseas.

The Knesset Finance Committee changed the original proposal and required the companies to invest at least half the dividend amount in Israel to receive the tax break.

Steinitz pushed the bill in an attempt to increase tax revenues next year when the treasury is facing a major tax shortfall of at least NIS 14 billion.

Steinitz surprised MKs when he told them he expected the new law to bring in NIS 8-9 billion in new tax revenues, as the the Finance Ministry had previously said it expected the new law to bring in only an additional NIS 3 billion. The total value of the trapped profits for all the companies covered by the Encouragement of Capital Investment Law that applies in this case is estimated at NIS 120 billion.

Thirty-eight MKs voted in favor and 21 against, split along coalition-opposition lines.

Two groups of activists tried to foil the trapped profits law.

The movements Yisrael Yekara Lanu and Hamishmar Hahevrati wrote to Knesset Speaker Reuven Rivlin urging him to hold up legislation of the law on grounds that interest groups were trying to fast-track it before the elections, turning a proposal into irrevocable law that doesn't do enough for the public good - but the Knesset voted it in anyway.

No limits on executive pay

The Knesset also approved the law on executive pay, which will increase supervision on compensation in publicly traded companies, but will not place any limits on salaries.

The new law requires the board of directors of a public company to appoint a special committee on compensation, which will be required to approve the salary conditions of the CEO and other senior executives. The committee will include a majority of external directors.

After approval by the full board, the shareholders' assembly will also have to approve the compensation packages. If shareholders do not approve, the matter will be returned to the board and the compensation committee.

But the committee will be able to circumvent the shareholders if it states the package is reasonable and meets company policy - and if such a shareholder vote might prevent the appointment of a senior executive.

The bill was based on the recommendations of a committee on the issue headed by Justice Minister Yaakov Neeman. The committee was formed after the cabinet objected to private bills introduced to place limits on executive pay, which were sponsored by Labor Party leader MK Shelly Yacimovich and Likud MK Haim Katz.

Fourteen MKs voted in favor of the bill, which passed its final readings, with Yacimovich voted against.

The original bills included a limit that would have prevented the highest-paid employee from earning more than 50 times the salary of the lowest-paid.

Dividends on water bills

The Knesset also passed a law to exempt local authorities from paying taxes on dividends they receive from the local water corporations they control. State Comptroller Joseph Shapira strongly opposed the bill, saying it provided incentives that were in direct opposition to the goals of the reforms behind the establishment of the water corporations. The idea was to remove the handling of local water systems from the local authorities and have semi-independent professional companies take over.

Encouraging the distribution of dividends, and untaxed ones at that, would violate the principle that consumers are to pay the real price for the water they consume - but no more, explained the State Comptroller. Now the local authorities may use the dividends for purposes not water-related. In a report released two weeks ago, Shapira recommended lowering water rates for consumers if the water corporations turned a profit - and not to distribute them to the cities. The comptroller called the dividend issue political.

To benefit only exporters

The Knesset also passed on its first reading an amendment to the Encouragement of Capital Investment Law, which denies state benefits to companies that do not export.

Technically, the change in the law raises the minimum population of the target market required under the law to 14 million, up from 12 million in the amendment to the law passed in 2005. The importance of this number is that the population of Israel and the Palestinian territories has risen to above 12 million, and under the present wording of the law, any company that produces for this joint market would meet the criteria previously intended only for exporters.

The reason the complicated wording is needed is that Israel has signed a number of mutual trade agreements that forbid favoring exports, but do allow such technical definitions of target markets. The change would be retroactive from the beginning of 2012. The Finance Committee will now prepare the law for its final readings.