The issue of royalties from oil and gas discoveries in Israel refuses to die down, with the Sheshinski Committee currently examining the matter. The State of Israel currently enjoys oil and gas royalties of 12.5% - one of the lowest rates in the world - and now there is a growing public call to raise royalties in the light of the "Tamar" and "Dalit" discoveries, and the possibility of additional gas discoveries such as "Leviathan." A special conference convened in Tel Aviv today to discus the issues at stake.
The Sheshinski Committee is due to make interim recommendations after the holidays, and its final recommendations should be released next month. Among the participants at the conference today were MK Shelly Yacimovich, who published an open letter yesterday to Yitzhak Tshuva, who controls Delek Group, which is one of the main companies behind the gas discoveries, calling on him "to return the country's treasures." The letter was sent following an interview with Tshuva in "Globes."
"We are on the way to becoming a gas superpower"
"After 400 dry drillings and 50 years of exploration, the Tamar drilling turned everything around," said Yossi Langotsky, the geologist on the "Tamar" and "Dalit" drillings." We are on the way to being a gas superpower."
Langotsky let loose at the gas tycoons, and supported raising royalties: "Instead of improving the security situation of the State of Israel, people who became dollar multimillionaires overnight are trying to prevent the State of Israel from declaring a fairer distribution of the profits. Their drunken lust for money caused them to treat us like a banana republic. They use all kinds of public relations people and threaten that if we raise royalties, this will scare off foreign investors.
"With all due respect to the risks that companies undertook drilling "Tamar", it should be remembered that the prospect was handed to Yitzhak Tshuva on a silver platter, so should they take the public interest into account. It is the duty of the State of Israel to change the royalty and taxation regime so that it gets the return it deserves! Should any company decide that it that is improper, let it leave!"
Yacimovich: Nature's treasures belong to us all
MK Yacimovich continued to attack the gas tycoons, and called for fair distribution of the gas and oil profits: "It is inconceivable that all this wealth will belong to one person or to a handful of people. The question is, to whom do the sea and natural resources belong? The answer is: to all of us. I want the gas companies and their investors to get rich; the question is the proportion, the way the wealth is distributed, and everyone knows that the way wealth is distributed in Israel is outrageous. It is not economic, and not moral, and not reasonable. In our bill, we are talking about raising royalties to 20% and raising corporate taxation to 60%."
Yacimovich attacked the claim of retroactivity made by the gas partnerships. "The state can change old-age pensions retroactively," she said, "It can change the terms of retirement savings, reduce company taxes, and so on. The state can also change royalties policy.
"I want to quote something that Tshuva's highly paid CEO Gideon Tadmor said: 'Why impose taxes? Because a golden egg has been laid here and they want to kill it even before it hatches.' When did he say that? In 2001! It's ridiculous. He said then that it would be a disaster to apply taxes retroactively; those remarks were made nine years ago. Tshuva, his partners, and his employees, have for a long time been trying to thwart an archaic law; so let hem not bamboozle us with retroaction. They are simply lying, it's all sleight of hand. No-one landed on them now by surprise."
On the arguments of private property and discrimination, Yacimovich said: "The state has no right to determine different tax rates on different industries? What is this denial of the state's right to set tax rates? I suggest you read the interview with Tshuva in Globes last week. It's bizarre. He will help veterans, the underprivileged - he, and not the state. This is a distorted notion of democracy. Once every few years, a central government is elected, and it will decide where the money goes, not Mr. Tshuva.
"My advice to Tshuva is to start negotiating with the Ministry of Finance. It will be cheaper, it will cost him less loss of public sympathy, and it will simply be more just."
Melchior: Adopt the Norwegian model
Rabbi Michael Melchior, who also supports raising the royalties, said he works closely with international bodies, and also spoke of the Norwegian model, where a special fund was set up to channel oil revenue for the public good.
"All over the world, including in Norway, where tax rates are high, companies continue to invest because they still earn a lot of money," said Melchior. "Natural resources belong to the State of Israel. No devious lawyer can change that. It's the state's responsibility. If there is damage, such as the sinkholes at the Dead Sea, the state will pay. They already want to deploy the army to protect the gas discoveries."
Melchior too commented on Tshuva's interview in "Globes", and said that he was prepared to do a deal with him: "In Egypt, taxation is 80% of profits; Mr. Tshuva, I'm prepared to buy the arrangement in Egypt. I'm not prepared to buy the disinformation you spread. The risks today are not as great as they were in the 1950s.The technology is much more advanced. Small businesses face much greater risks than in drilling for gas, and none of them claims that the state should compensate them. There are no special tax breaks just for them, for gas and oil exploration companies. They are unique, but we can't let them be unique in taxation. The big companies paid 0% tax last year.0%!."
In conclusion, Melchior expressed support for the Norwegian model: "Norway is a good example, because they exploited the profits in the right way. They also think about future generations. They did not lower the price of gasoline, they did not lower taxation, and so a large proportion of the citizens of that country, which was very poor, enjoy one of the highest qualities of life in the world. We can do the same."
Amit Mor: Lower expectations
Dr Amit Mor, CEO of Eco Energy Ltd., said at the conference that there were many models in the world, but that ultimately the question was how much profit would remain with the private sector entrepreneurs, and how much would go to the public. He recalled that in Australia, the prime minister resigned a few months ago over these very issues. He also noted that a year ago, the Canadian equivalent of the Sheshinski Committee published a report with most interesting methodologies. The Canadian report, from which much can be learned, sets out a system of progressive taxation in accordance with different quantities.
Mor estimates that the amount of gas in Israel will total 6-8 billion cubic meters a year, making for annual sales of $700-800 million by about 2020."We need to get things into proportion," he said. "The government's share will therefore not be very significant. They won't solve all the problems in education and the health system even if they raise royalties. Some of the proceeds, which will be quite modest, will go to the state budget, and some will go to a fund for future generations. We must lower expectations. The revenue here will be equivalent to a quarter or half percent additional VAT. That's all."
Prof. Amir Barnea of the Interdisciplinary Center in Herzliya, who gave an opinion to the Sheshinski Committee, said at the conference that when the licenses were given out, there was no line of investors, and that the government wanted to encourage investors to enter energy exploration.
"The methodology of international comparison is very problematic, it is very much subject to factors such as the geopolitical situation, for example," Barnea said. "The main reason for low taxation is the low rate of companies tax. The personal tax paid by investors - and it is very high - is not taken into account .In short, there are many measurement problems, but let's accept for a moment the assumption that the government's revenues are significantly lower than the global norm; it can be assumed that a company like Noble will appeal to the courts if the rules are changed. Uncertainty carries a price. Of course this could delay the process of oil exploration and production, which is a very long process in itself."
Barnea also said that it was necessary to take care that raising royalties would not lead to higher electricity prices, and so in the UK it was decided to cancel royalties altogether. Barnea argued that the "Tamar" discovery was not such a big event, and he too said that the level of expectations and enthusiasm needed to be lowered.
"Finding the natural gas is not a formative event, even including the "Leviathan" reserve, which is still not clearly commercial," Barnea said ."Even with "Leviathan", this is an important event, but not of decisive national importance. Economically, there's no need for a great reform. Overall, this event is important, but not fundamentally so."
"They're cheating us"
Barnea was followed by Prof. Ishak Saporta of Tel Aviv University, who attacked him, saying, "Suddenly everyone's lowering the flame. So, was there a trick that made everyone so enthusiastic and stock prices go up?" He also addressed the retroaction claim, saying: "I didn't see all these people screaming when the government cut welfare allowances by 40%.What happened?"
Former Income Tax Commissioner Moshe Gavish said, "It's possible to raise the royalties and tax rates. There is no retroactivity in the wish to raise royalties. On income from today onwards there is no retroaction. People are deceiving us right and left. The courts have discussed this matter very often.
"In 2003, similar allegations were raised when they taxed overseas income, and the High Court of Justice dismissed the claims."
MK Nitzan Horowitz took advantage of the conference to talk about phosphate, known as "white gold", of which Israel has huge reserves. "Just one field near Arad has reserves worth NIS 100 billion. There too, Israel Corporation received the concession. Phosphate is a scarce resource. One official at the Ministry of National Infrastructures simply gave the company the license. The state receives royalties of 3-5%. Along with companies tax it comes to something like 30%.It is run under a law from the 20s of the previous century."
Published by Globes [online], Israel business news - www.globes-online.com - on September 13, 2010
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