After a stormy session, the Knesset Finance Committee today passed the trapped profits tax bill for its second and third readings by the Knesset plenum. The bill will allow companies to use profits accumulated in Israel, which until now could not be sent out of the country, for foreign investment, in exchange for a reduced tax rate and commitment to invest up to 50% of the profits in the country.
Ministry of Finance and Israel Tax Authority sources estimate that companies benefiting from tax breaks by law have accumulated NIS 120 billion in trapped profits. The Ministry of Finance hopes that approval of the new law will generate NIS 3 billion in revenues.
The companies' requirement to invest half of their local profits in Israel is the result of a compromise between them and the Ministry of Finance, after Finance Committee members demanded that the state increase its tax revenues from the companies above NIS 3 billion.
The bill grants a tax break of 40-70% for companies that wish to pay a tax on their profits. The tax rate will be 6-17.5%, instead of the 10-25% set in the current version of the Law for the Encouragement of Capital Investment. In addition to the tax break, the companies must invest half of their trapped profits in Israel in one of three ways: in productive assets at plants; R&D; or in hiring new employees at the same plant. For this investment, the companies will receive a 60% tax break.
During today's discussion, Finance Committee chairman MK Moshe Gafni (United Torah Judaism) said, "For a great many years, this money was not touched, and this is true for every government from all sides of the political map. We're talking about NIS 120 billion from which the state has not seen a single shekel."
Tax Authority director general Doron Arbeli said, "This is an important and proper measure led by the minister so that the Ministry of Finance and the Tax Authority will finally see money that we have not seen for more than two decades because of the same problem in the old Law for the Encouragement of Capital Investment."
Tax Authority sources said that its approach in recent years has been based on a legal opinion by Deputy Attorney General Avi Licht and cases of tax assessments on Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) and Check Point Software Technologies Ltd. (Nasdaq: CHKP). Two years ago, the Tax Authority demanded NIS 1.4 billion in taxes from Check Point on income from its Singapore subsidiary in 2002-05. The Tax Authority also negotiated with Teva on a NIS 2.7 billion tax assessment for its acquisition of Ivax in 2005.
Licht said that collecting the taxes stemmed from a mistake and incorrect interpretation of the law by the Tax Authority. He said, "Some of the profits have already been taken out of the country and the Tax Authority has no idea how much remains. The Tax Authority did not issue assessments to the companies that in practice were able to move money out of the country and realize profits by buying subsidiaries in Israel and abroad."
Licht said that the Attorney General would issue a professional opinion in the coming days.
During the Finance Committee meeting, Labor Party chairwoman MK Shelly Yachimovich criticized Ministry of Finance director general Doron Cohen, saying, "It's a pity that you messed around with the Ministry of Industry, Trade and Labor and did not accept at the outset the proposal by the minister and ministry which discussed, like me, a plan that made tax breaks subject to investment in Israel. This is the most logical thing in the world, and whoever came up with the idea to grant the exemption to companies that export all their profits acted with unparalleled stupidity, stupidity for which the finance minister should be condemned."
Published by Globes [online], Israel business news - www.globes-online.com - on September 23, 2012
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