Four of Israel's biggest companies - Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), Israel Chemicals Ltd. (TASE: ICL), Intel Israel Ltd., and Check Point Software Technologies Ltd. (Nasdaq: CHKP) - received 70% of government grants under the Law for the Encouragement of Capital Investments, according a Ministry of Finance's State Revenues Administration report that was partly released today. The report concludes, "A review of this law is therefore necessary."
The report lists the tax breaks granted under the law in 2003-10, and describes the substantial growth in the breaks from NIS 2.3 billion in 2003 to NIS 5.6 billion in 2010 - an increase of 143%.
The Ministry of Finance withheld publication of this chapter of the report for 6-12 months, after "Globes" launched its campaign to limit the tax breaks granted to Israel's big companies. The ministry benefited the companies twice over, because the companies tax rate was reduced from 36% in 2003 to 25% in 2010. Had the companies tax rate stayed at 36%, the tax break would have been NIS 8.3 billion.
Almost 2,000 Israeli companies have received tax breaks under the Law for the Encouragement of Capital Investments, but most of the money goes to Teva, Israel Chemicals, Intel Israel, and Check Point. In 2010, these four companies received 70% of the tax breaks, amounting to NIS 3.92 billion. In 2003, these four companies' tax breaks totaled NIS 736 million, or 32% of the tax breaks for that year.
The reason for the substantial increase in the companies' tax breaks is the growth in their profits and tax-exempt revenue under the law's "Green track". Teva, Israel Chemicals, Intel Israel, and Check Point's aggregate profits from NIS 3.2 billion in 2003 to NIS 18.2 billion in 2010, and the proportion of the tax exempt revenue from 17% to 77%.
The State Revenues Administration's report also discloses that the effective tax rate of the top 1% of companies fell to 3.3% in 2010 from 16% in 2003, while the other 99% of companies paid a tax rate of 10.5-20.8%. The report also explodes the myth that Teva, Israel Chemicals, Intel Israel, and Check Point contribute to the development of the periphery: companies in the Galilee and Negev account for 28% of tax breaks under the law, compared with 53% of companies in the Tel Aviv area.
The State Revenues Administration's report does not provide information on tax breaks in 2011-12, except for an implication that nothing has changed. "Although Amendment 68 of the Law for the Encouragement of Capital Investment, which came into effect in 2011, reduces the concentration in tax breaks, mainly by setting a minimum tax break that is higher than the estimated effective tax rate of big companies (set at 6% in the periphery and 12% in central Israel), but no dramatic change in the concentration of tax breaks is expected, because the amendment's main effect is to create simplified, clear, and certain tax breaks mechanism under the law in its previous format. A review of this law is therefore necessary."
Israel Chemicals said in response, "Israel Chemicals was the only company which was excluded from the Law for the Encouragement of Capital Investments in late 2010. As a consequence, the company paid a tax rate of 15% in 2012, and its tax breaks totaled $121 million, substantially less than its tax payments for the year. In the coming years, it will pay a companies tax rate of 25%.
"Since 2003, Israel Chemicals has not received any grants from the state. A year ago, the government doubled the royalties that the company pays on potash to 16% of the pretax profit. As a result, Israel Chemicals currently transfers NIS 1.5 billion a year to the government, which together with the dividend tax, amounts to 41% of the company's pretax profit on its operations in Israel. In addition, the government decided that Israel Chemicals will finance the national project to save the Dead Sea hotels, at a total cost of NIS 4 billion.
"In contrast to the report, over 90% of Israel Chemicals' employees reside in the periphery, and not as stated."
Published by Globes [online], Israel business news - www.globes-online.com - on May 5, 2013
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013