Sources inform ''Globes'' that Minister of Finance Yuval Steinitz and Israel Tax Authority director general Doron Arbeli are planning billions of shekels in tax breaks for Israeli and foreign companies, which benefit from the Law for the Encouragement of Capital Investments and want to transfer dividends abroad. The Tax Authority estimates that NIS 100 billion in capital is "trapped" in Israel. This money has been accumulated by a small number of companies, including Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), Check Point Software Technologies Ltd. (Nasdaq: CHKP), Israel Chemicals Ltd. (TASE: ICL), Iscar Ltd., and Intel Corporation (Nasdaq: INTC).
A senior Tax Authority official said, "There is a very small number of companies which hold billion of shekels in accumulated capital. 20% of the companies hold 80% of the trapped capital, and the question is what to do with them now."
Under the old Law for the Encouragement of Capital Investments, which was in force until 2010, companies that benefited from generous tax breaks had to keep their profits and dividends in Israel, in order not to lose the tax breaks. If they transferred the capital abroad, they had to pay the full tax rate on it. The new law abolished this condition, but several companies accumulated capital while the old law was still in effect. Intel, as "Globes" revealed last week, wants to transfer the capital abroad to help finance its new fab in Ireland.
Currently, companies seeking to export trapped capital have to pay an additional tax rate averaging 17%, depending on their tax plan. Steinitz and Arbeli are now considering a limited plan to forego part of the taxes in order to obtain an immediate cash inflow to cover part of the ballooning deficit. As far as they are concerned, it is better to get part of the money now than nothing ever, since companies succeed in avoiding taxes through complicated tax planning or court rulings to defer their taxes. Arbeli also believes that friction with foreign companies should be reduced.
Opinion in the Tax Authority about dividend taxes has been divided for years. Although some companies, such as Check Point and Teva, have been prevented from transferring capital abroad through creative ways, from time to time, other companies obtained pre-rulings facilitating the use of the trapped capital.
Sources believe that if Steinitz approves a directive for a tax break on the distribution of dividends by these companies, the total tax rate will fall to 15-20% from the current 40% (25% companies tax plus 15% dividend tax). The assessments are based on previous directives issued on the distribution of dividends. For example, the 2009 stimulus plan included a directive to cut the dividend tax to 5% from 25% on dividends received by Israeli companies from foreign companies during 2009 alone, provided that the proceeds were used only in Israel within a year of the receipt of the dividend. That same year, as part of the Economic Arrangements Law for 2009-10, a directive set a 12% dividend tax rate for shareholders who had founded companies in Israel before 2003, as well as other conditions.
Accountant General strongly objects
The sources add that Accountant General Michal Abadi-Boiangiu strong opposes Steinitz and Arbeli's tax breaks plan. She argues that no quarter should be granted these companies, even if they invest in Israel and create local jobs, as she considers the plan as a reward for tax planning.
Published by Globes [online], Israel business news - www.globes-online.com - on May 28, 2012
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