Teva has NIS 40b trapped in Israel

Among other companies that could benefit from proposed tax relaxations are Intel, Check Point, and Israel Chemicals.

Sources inform ''Globes'' that Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) holds NIS 40 billion of the NIS 100 billion held by multinational companies that is trapped in Israel. Teva cannot transfer this money out of Israel without paying a 15% dividend tax. The rest of the trapped capital is held by Intel Corporation (Nasdaq: INTC), Iscar Ltd., Israel Chemicals Ltd. (TASE: ICL), Check Point Software Technologies Ltd. (Nasdaq: CHKP), Hewlett Packard Co. (NYSE:HPQ), Motorola Solutions Inc. (NYSE: MSI), and they would have to pay billions of shekels in taxes were they to transfer the capital out of the country.

Top Ministry of Finance and Israel Tax Authority officials were due to discuss Minister of Finance Yuval Steinitz's plan to slash the tax liability of the small number of big companies if they apply to transfer the capital out of the country, tomorrow, but the sources said that he postponed the meeting indefinitely. The sources added that he ordered all the parties involved in the matter, including the Tax Authority, to prepare an explicit and detailed policy document on the ministry's alternatives on the matter.

A senior Ministry of Finance official told "Globes" today, "The feeling is that the finance minister has not given up on this initiative."

However, "Globes'" expose of the proposed tax break and the public debate it caused, led to the proposal's sponsors to reconsider. Another top ministry official said, "The impression that the media is trying to create that this is the only thing that the Finance Ministry is discussing, is incorrect."

Strapped for cash

Currently, companies seeking to transfer profits out of Israel hold separate negotiations with the Tax Authority and the Ministry of Finance. For example, Intel has been in talks for months with the Jerusalem tax assessor for a pre-ruling to transfer NIS 12 billion out of the country to lend to a subsidiary in a foreign country. Intel says that it wants the capital to use as an offset in the US and reinvest in Israel. The pre-ruling process is intended to examine the Israeli authorities' willingness to give the company a generous tax break of NIS 3 billion. "Globes" was the first to report the matter last week.

The Ministry of Finance is desperate for cash, in view of what one top official called "one of the most difficult times in terms of the budget." Israel Tax Authority director general Doron Arbeli and Steinitz view the capital coming from the reduced taxes that the companies will pay as a windfall - about NIS 15 billion in immediate revenues, at a time of generally declining tax revenues.

Ministry of Finance Budget Department and other officials are standing in the front line that is emerging against Arbeli and Steinitz. These officials warn against a "fire sale", as one official called, or "an irresponsible giveaway to companies that have already done well and which are in excellent financial shape" in the words of another official.

According to officials close to the issue, in the event of major changes in the rules of the game, it would be better for the state to maximize the new reality: allow companies concerned to transfer capital they have accumulated in Israel (partly thanks to generous government grants and huge tax breaks under the Law for the Encouragement of Capital Investments) by offering attractive terms, which would still generate NIS 30-40 billion in tax revenues.

"In any case, this is an insane situation, which it would have been better never to have fallen into," a top economic source told "Globes". "Money exported from Israel by these companies will not return. There is no wonder plan that will allow us to have the best of both worlds. The capital trapped in Israel is the economy's insurance policy in many critical places, such as jobs, a company's commitment to stay in Israel, and invest in it. If all this capital leaves, it does not matter how much tax revenues the state gains in the short term, it will be a national disaster."

The source criticized the top Ministry of Finance and Tax Authority officials, saying, "It is possible to decide to make a sweeping decision to cut VAT to zero. It's possible to argue that the measure will dramatically increase growth in Israel. So what? Would anyone do it? This would be such a problematic measure that if anyone imagined turning it into a proposal for decision, it would face fierce opposition in the Knesset Finance Committee, and the whole thing would end up at the prime minister's door."

Finance Ministry not talking to the Industry Ministry

Steinitz and Arbeli would also find in the front line against the proposal, should it actually take shape, Minister of Industry, Trade and Labor Shalom Simhon, director general Sharon Kedmi, and Investment Promotion Center director Hezi Zaieg. Meanwhile, all the discussions by the Ministry of Finance chiefs on the controversial issue are taking place in the absence of the Ministry of Industry's professional staff.

This is not the first time that the top two economic ministries have severed relations. Last week, the Ministry of Industry lambasted Steinitz's secret negotiations channel with Intel in a failed effort to persuade the company to build its new fab in Israel. He did not update the Ministry of Industry and he deviated from the proposal for Intel formulated by the expert team that examined the issue. Despite Steinitz's intense contacts with Intel executives, the company decided to make the investment in Ireland, apparently because it received a better offer.

Teva said in response to the report about the amount of its trapped capital, "Teva is holding a dialogue with the relevant authorities on this matter."

Published by Globes [online], Israel business news - www.globes-online.com - on May 30, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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