Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) reported in the 20-F annual statement filed with the US Securities and Exchange Commission (SEC) yesterday that if it decides by November 2013 to distribute a dividend from its trapped profits in Israel, it may benefit from an Israeli tax break under the trapped profits amendment to the Law for the Encouragement of Capital Investment, and make a one-time tax payment of $700 million (NIS 2.6 billion).
The Law for the Encouragement of Capital Investment (5719-1959) is intended to encourage companies to invest in Israel. The law provides that any company classified as an "approved enterprise" is eligible for a tax break, effectively paying a zero tax rate. The law also provides however that when a company to which it applies wants to distribute dividends from untaxed profits (under the law), it will pay tax at a rate of 15% on the profits, plus companies tax, which is currently 25%, making a total tax rate of 40%.
This condition has created a situation in which large companies, which have accumulated huge profits over decades (such as Check Point Software Technologies Ltd. (Nasdaq: CHKP)) have not distributed dividends because of the tax liability that would be incurred in the event of a distribution. To avoid paying this tax, the companies essentially trapped the untaxed profits. This led to the trapped profits amendment, which allows companies to pay a lower tax rate than 15% on the dividends distributed from the untaxed profits, and exempts them from the 25% companies tax. In effect, the amendment gives the companies an extra tax break. The amendment sets out various taxation tracks, and there is no uniform rate for all companies.
In the case of Teva, the company says, as mentioned, that it will pay a one-time tax liability of $700 million if it takes advantage of the trapped profits amendment. In May, "Globes" reported that Teva's trapped profits amounted to around NIS 40 billion, out of the NIS 100 billion total of trapped profits of large Israeli companies. On the basis of this figure, Teva will pay a tax rate of 6-7% at the most, a figure that fits with the average rate in the amendment's various taxation tracks.
$5 million in taxes a year
The figure mentioned by Teva is just one example of the huge tax breaks given the company over the years. Investigation by "Globes" found that, in the past ten years (2003-12), Teva has made profits of $17.2 billion, on which it paid $1.9 billion in taxes - an effective rate of just 10.7%. Moreover, in 2012, Teva's effective tax rate was negative, for the first time in at least ten years, at minus 7.5%, amounting to a tax benefit of $137 million.
Isolating Teva's tax payments on its Israeli operations only, "Globes" found that the company paid $787 million tax on $14.2 billion in profits on its Israeli operations in 2003-12, giving an effective tax rate of just 5.6%.
On top of this, in 2012, Teva's tax rate on its activity in Israel fell to a 10-year low of just 0.3%, or $5 million.
These figures highlight the huge tax breaks given to companies like Teva and Check Point over the past decade, and the downside of the Law for the Encouragement of Capital Investment - a law that after 54 years is perhaps no longer justified.
Published by Globes [online], Israel business news - www.globes-online.com - on February 13, 2013
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013