“Iscar Ltd. has generated far more tax revenues to date than what it has received, and will continue to do so,” says Investment Promotion Center director Hezi Zaieg. “The $1 billion it is now paying in taxes is far greater than the grants the company has received over the years.”
Iscar has received NIS 250 million in grants, as well as hundreds of million of dollars in company tax exemptions.
Zaieg claims, “Direct tax revenues [paid by Iscar] are far greater, not to mention billions paid in indirect taxes on 2,000 employees in Israel.
“If [Berkshire Hathaway chairman and CEO Warren] Buffett invests an additional $150 million, he will employ more people and pay hundreds of millions [of shekels] in indirect taxes on them. Bottom line, this means that the state will see more tax revenues than it appears.”
Zaieg made the comments in response to reports today that the sale of 80% of Iscar to Berkshire Hathaway Inc. (NYSE: BRK-A; BRK-B) for $4 billion will create a tax credit of more than $2 billion, more than double the $1 billion tax Iscar owners, the Wertheimer family, will pay on the sale of the company.
Reports claim, among other things, that Iscar will be eligible for strategic investor status if it invests $50 million in R&D a year over the next three years, an amount that the company is apparently planning to invest anyway. However, strategic investors status is not linked to companies’ investment in R&D, but to investment in equipment and production lines, which create jobs, and significantly boost indirect tax payments.
Zaieg said Iscar currently did not invest more than $20 million a year in production equipment, and that it would now invest $150 million over a maximum of three tax years in order to be eligible for strategic investor status, regardless of its continuing high investment in R&D.
Berkshire Hathaway also meets another threshold condition for recognition as a strategic investor: more than $3 billion in turnover.
Today’s reports implied that strategic investor status under the Encouragement of Capital Investments Law gave Buffett a sweeping ten-year exemption from income tax, “including an exemption on capital gains taxes on a future sale.”
In reality, the Encouragement of Capital Investments Law stipulates that a tax exemption is on income, including the withdrawal of dividends, and not on capital gains. Even if Buffett, who has been known as an investor for decades, sells Iscar during the ten years during which he will benefit as a strategic investor (and afterwards, of course), he will be liable to full capital gains tax on the sale at the prevailing tax rates in Israel.
In any event, additional investment will create hundreds of jobs at Iscar, which will greatly boost the company’s indirect tax payments.
In a meeting prior to the close and announcement of the Iscar deal, Zaieg, Israel Tax Authority director Jackie Matza, Iscar chairman Eitan Wertheimer, and Iscar CFO Dan Goldman agreed in principle to a pre-ruling and to the terms for recognizing Iscar as a strategic investor in Israel. Zaieg said, “The moment there is a ruling, the Tax Authority can publish the details of the arrangement. However, the current status is that of a pre-ruling. At the moment, there is an agreement in principle, which does not include precise amounts, only principles and techniques, and there is nothing to report yet.”
Published by Globes [online], Israel business news - www.globes.co.il - on May 14, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006