Sheshinski: Bring gas ashore early, pay less tax

The final Sheshinski committee recommendations include incentives that in effect exempt the Tamar discovery from raised tax rates.

Increasing the government's take (taxes and royalties) from oil and gas revenue from the current one-third to 52-62% is the Sheshinski committee's main final recommendation. It also recommends levying a progressive tax ranging from 20% to 50% on profits and canceling the depletion allowance. The royalties rate will remain unchanged at 12.5%.

"During the interim period, the government's take from revenue from the oil and gas reserves will be 43-59%, below the level of comparable countries in the world", said Prof. Eytan Sheshinski at this afternoon's press conference to present the recommendations.

Despite demands by Minister of National Infrastructures Uzi Landau to exempt the Tamar gas discovery from the recommendations, the Sheshinski committee did not do so. As a consequence the Ministry of National Infrastructures' two committee members opposed the recommendations and issued a minority report.

However, the final recommendations did set out tax breaks for the Mari B and Tamar fields. The regulations in essence provide an incentive for the Tamar partners to develop the field and begin production within three years.

The final report sets out a special program for "reserves that begin production no later than January 1, 2014". The main beneficiary of this program is Tamar. The program will give Tamar an enlarged R-factor of 2-2.8, which means that taxes will begin to be levied on Tamar only after a 200% return on the investment in exploration and development of the reserves. (R-factor is a taxation method which can ensure that investors recoup their full investment before beginning to pay tax.)

The final report also awards an accelerated depreciation of 15% on reservoirs developed by the end of 2013. Tamar should also benefit from this easement.

Sources inform ''Globes'' that, at the last minute, the committee withdrew plans to award tax breaks to Leviathan as well.

The Sheshinski committee recommendations will now go to the government for discussion.

The final report includes several additional easements and tax breaks compared with the interim recommendations, which were published on November 15. The interim recommendations set the government's take at 68% and the maximum tax rate on oil and gas profits at 60%.

In addition to breaks aimed to benefit Tamar, another special program is established for "reservoirs where commercial production began before the establishment of the committee". The only reservoir that meets this criterion is Yam Tethys's Mari B well, 35 kilometers offshore from Ashkelon. The model sets out that by the end of 2015, such reservoirs will be taxed at a reduced rate of 50% of the tax rate due to be levied.

In addition, the tax rate will be calculated as if production at the reservoir began when the tax rate was levied, and not since 2004, when production from Mari B actually began. This means an initial tax rate of 20%, which will gradually increase, instead of an immediate tax rate of 60% as proposed in the interim recommendations.

The final report also proposes general benefits, including the possibility of deducting royalties on payments to parties at interest in the partnerships from the company tax paid by the companies. This tax break greatly reduces the companies' profits that are liable to tax.

Published by Globes [online], Israel business news - - on January 3, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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