The NIS 5.6 billion in tax breaks that the State Revenues Administration announced on Sunday is small change compared with what has been happening since, and what will happen in the coming years.
The figure above refers to 2010, and corporate tax breaks have further ballooned, and will reach NIS 7-8 billion in 2013, and NIS 12-14 billion a year in the next couple of years. Tax breaks will grow by 20-25% a year, until all the projects are completed in 10-15 years, under the old Law for the Encouragement of Capital Investments regime, before the amendment to the law came into effect in 2011.
If someone does put a stop to this now, and does not change the amount of tax set in the amendment to the new law, which is also turning out to be unworthy in relation to the prevailing companies tax rate, Israel will face an extremely serious revenues problem in the coming years."
The chapter in the State Revenues Report for 2011, which the State Revenues Administration published earlier this week, after a long and puzzling delay, states in Comment 4 in Chapter 9, "The figures for 2011 will only be available during 2013, because summarizing the companies' reports, especially of the big companies, takes a long time."
The 2011 report therefore relates to 2010, and the old Law for the Encouragement of Capital Investments. The report stated that, in 2003-10, tax breaks soared from NIS 2.3 billion in 2003 to NIS 5.6 billion in 2010. In this period the aggregate revenue of the four big 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), which are the beneficiaries of 70% of the tax breaks under the law - rose by 470% from NIS 3.2 billion in nominal terms to NIS 18.2 billion in 2010. In comparison, the aggregate revenue growth of the 600-700 other beneficiaries of the law rose by just 29% over the same period, from NIS 7.7 billion in 2003 to NIS 10 billion in 2010.
The report also states that the share of these four companies of total tax-exempt revenue soared during this period from 17% in 2003 to 77% in 2010. The report says that this may have been because of higher investments and/or higher profit margins and/or "accounting diversions of the profits of foreign subsidiaries or affiliated companies in countries with higher tax rates than the companies tax rate in Israel."
Even when it is understood that the report's opening year, 2003 (which was a year with an across-the-board tax break), was a bad year for the economy in the aftermath of the global high-tech crisis, it is clear that the rapid growth in the business revenue of Teva, Israel Chemicals, Intel Israel, and Check Point continued through 2011 and 2012, and the growth in their tax breaks presumably grew as well, for whatever reason.
Hence the expectation of further rapid increase in tax breaks in 2013 and subsequently, as the lifespan of the projects for which the companies received the exorbitant tax breaks draws to a close. It should be noted that some companies, especially Intel Israel, also received billions of shekels in government grants at the same time that they received the tax breaks. These companies are also the subject of the "trapped profits" scandal - the tens of billions of shekels in profits accumulated, mostly by the export-oriented companies led by the abovementioned big four, which they have used without paying proper taxes on them, and the frequent use of aggressive tax planning schemes, some of which have been stuck in court for years.
Published by Globes [online], Israel business news - www.globes-online.com - on May 7, 2013
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