"The economy is in serious budget distress, reflected in the huge budget deficit. There is no question that this deficit should be greatly reduced, but it is unimaginable that these companies will not share the burden that will soon fall on the public," said Prof. Avi Ben-Bassat of the Hebrew University of Jerusalem and former Ministry of Finance director general, today, in response to the State Revenues Administration's report that 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 NIS 3.8 billion in tax breaks since 2010.
Ben-Basset, a strong opponent of the Law for the Encouragement of Capital Investment, said that its characteristics and paucity of achievements required a massive reduction in its incentives. "Although the amendment to the law will generate little revenues in the coming year, they will gradually increase from one year to the next, and will ease the tax burden on others," he said.
For years, Ben-Bassat warned of the law's numerous distortions, but even he was surprised by the report's findings. "The new report by the State Revenues Administration shows that the distortions are even greater. The law was intended to encourage entrepreneurship and innovation, and give priority to development areas by improving the business sector's competitiveness. But in practice, the incentives granted have nothing to do with innovation. This is a slogan which is not realized in the criteria.
"Moreover, the law severely discriminates between exporters and manufacturers of import substitutes for the domestic market, which must also cope with foreign competition. It should be emphasized that $100 in exports and $100 in import substitution make exactly the same contribution to growth and foreign currency reserves."
Ben-Bassat added, "Any discrimination between the two causes inefficient allocation of capital, credit, and workers, and therefore harms economic growth."
Ben-Bassat is also angry that, even though Law for the Encouragement of Capital Investments has a limited grants and controllable budget, the tax breaks are unlimited, and depend on the eligible companies' profits. "Since there is no budget limit to the tax breaks, they have grown massively in recent years, amounting to NIS 5.6 billion in 2010.
"In 2010, these four companies accounted for 70% of the tax breaks. Moreover, development areas received only 28% of the benefits pie. These figures prove that the tax breaks seriously discriminate between companies, as well as greatly exacerbating inequality between individuals in the economy. There is no question that the companies' owners enjoy huge subsidies, which is ultimately reflected in heavier taxes collected from others, or in the provision of fewer services to the people."
Ben-Bassat concluded, "If we want to improve the attraction of development areas as preferred residential locations for the wealthy, they should receive completely different incentives: a gradual cancellation of the law in its current form and diversion of most of the sources freed up to improving the quality of life in development areas through a wide spectrum of means, such as education enrichment programs, libraries music conservatories, sports and cultural halls, public parks, and water, electricity, communications and other infrastructures. Kfar Havradim in Tefen should be an example of what we ought to strive for."
Published by Globes [online], Israel business news - www.globes-online.com - on May 6, 2013
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