Teva Pharmaceutical Industries is the darling of the nation. There's a reason it's called "the people's stock." The thing is, Teva is the darling of the nation in more than one respect. Israelis like to buy the stock and the state likes to pamper the company, through tax breaks.
According to unofficial estimates, Teva's corporate tax rate is practically zero.
We must stress that Teva denies any such thing. It says its tax rate is close to 10%, but its denial is feeble. State sources admit that out of the NIS 5.6 billion in tax breaks that the state grants under the Capital Investment Encouragement Law, Teva gets about NIS 2 billion.
In other words, a single company in Israel receives 35% of the tax breaks for exporters.
In its defense, Teva could argue that it contributes vastly to Israel, in many areas. It supports R&D, it employs more than 2,000 people, it brings in foreign currency, and of course, it's a model for emulation and a source of national pride. All true, and there's no question that Teva has won its status as darling of the nation by right.
Yet one cannot ignore the fact that honeybunch knows how to collect a price from the state for all that.
According to Tax Authority figures, in 2008 the four biggest exporters - Teva, Israel Chemicals, Iscar and apparently one of the high-tech giants; in other words, the top 1% of Israeli exporters - paid a corporate tax rate of 7.2%. Smaller exporters paid corporate tax of 12% to 16%.
Altogether, 72% of the NIS 5.6 billion in tax breaks went to the four big exporters.
Summing up, the Capital Investment Encouragement Law is in practice a regressive law. It enables the biggest, strongest exporters, first and foremost Teva, to pay much less tax and get many more breaks than smaller companies.
Moreover, the Tax Authority looked into the relationship between tax breaks that exporters get under the law and other tax payments these companies make - income on which they have to pay corporate tax in full (24% ), income tax deducted from workers' pay and so on.
It turns out that in 2008, the ratio between tax breaks on income and income among those biggest four exporters led by Teva was 222%.
What does that number mean? It means that the rate of breaks the Big Four get from the state is 2.2 times bigger than the tax they pay the state, including income tax paid by their workers.
Therefore, the immediate price Teva collects from the state is NIS 2 billion in annual tax breaks - 2.2 times more than the tax the state gets from Teva.
With all due respect to our national beloved, one has to admit that this a very high price. Apparently too high.
The state has realized as much. This year the Capital Investment Encouragement Law was amended to make it a tad more equitable, meaning that it will help all exporters, not just the Big Four.
Under the new rules, one of the Big Four, Israel Chemicals, lost its preferred status entirely. Teva's corporate tax rate rises from roughly zero to around 12%.
Or it would have. One doesn't pick a fight with the national sweetheart. Therefore, a special clause was created in the law, the "strategic track," allowing big companies to pay only 5% corporate tax. So Teva's corporate tax rate rises from roughly zero to just 5%.
Even so, the changes that eliminate Israel Chemicals' eligibility and raise Teva's tax rate will add about a billion shekels to the state's tax revenue.
Even after this crucial legislative change, the Capital Investment Encouragement Law remains flawed. The Tax Authority checked how the tax breaks in 2008 would have been distributed if the amendments had already been in force. Most of the breaks would still have gone to the biggest companies, it found. And the part going to companies in the country's outskirts only grew from 20% to 31%.
Teva, we must note, does not cavil at threatening that if the state increases its tax burden too much, it will stop opening new plants in Israel. Being a global company, this is relatively easy for it to do. It's not a threat to be taken lightly.
That's exactly why the Capital Investment Encouragement Law, including in its amended form, remains regressive and helps mainly the strongest exporters, which don't need tax breaks to survive. The state is using its money to make the rich richer, with Teva at the forefront.
Can't this enrichment of the richest companies be stopped? The state figures not, because of global competition and the fear that the strongest companies will decamp and move away.
The state could be wrong, but after its massive amendment, the Capital Investment Encouragement Law isn't about to be changed again in the foreseeable future. Yet one can and should take advantage of the changes already made to make the Israeli tax system more equitable from another perspective. After heaping tax benefits on the biggest exporters and ensuring they'll stay put, one can and should safeguard the state's income from corporate tax.
Meaning: Stop the prime minister's plan to reduce corporate tax from 24% to 18%. The ones that pay the most corporate tax are banks, insurance companies, the biggest industrial concerns, the retail giants and the mobile operators, and they can't get up and go elsewhere anyway. So why give up an income source when tax revenue from them could be used to make Israeli society more equitable?
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