Israel to tax exported gas at full price

The move is expected to lop 10-15% off the current valuation of the gas reserves.

Minister of Finance Yair Lapid is initiating a rise in the taxation of Israeli gas through full taxation of gas for export. Within three months, Lapid is to publish a bill for imposing special taxation on gas for export, but the developers will be assured a "normative profit" free of tax, according to the draft resolution on exports of gas that will be brought before the government for approval on Sunday. Ministry of Finance sources admitted today that getting into the territory of taxation of gas presents the state with the difficult challenge of preventing tax planning by the developers.

The legislative initiative is expected to hit the profitability of gas exports, and to lop 10-15% off the current valuation of the gas reserves, in the view of market sources. The taxation hit will be larger if it is decided to export the gas via a pipeline to Turkey than if it is decided to export by means of an liquefaction installation, because of the higher return on capital of the Turkish option.

The subject of taxation of gas exports was not dealt with individually in the law for taxation of super profits on oil and gas drafted in accordance with the recommendations of the Sheshinski committee. The reason for that was the fear that the gas exporters would be able to reduce their tax liabilities through creative tax planning. Instead, a general arrangement was adopted that ignored the gap between the local price of gas and its export price. The arrangement stipulates that gas sold for export will be taxed only on the local component, or the transfer price, which is supposed to reflect prevailing prices in the local market. So, for example, if gas is sold in Israel at $6 per thermal unit, then, in the event of a sale to Turkey at $10, tax will apply as though the deal were done in Israel (that is, at $6).

Under the new arrangement that arises from the draft government resolution, tax will apply to the full price (that is, $10 in the Turkish example), after discounting a "normative profit" reflecting the normal return on capital in the gas export industry, and recognizing the costs of constructing export installations and the cost of transporting the gas. Like the recognition of profit, recognition of allowable expenses will be based on normative costs reflecting prevailing global prices, in order to prevent the developers from trying to reduce their tax liabilities through creative planning. The problem with this arrangement, as pointed out by Dana Tabachnik, Head of Economy and Environment at Adam Teva V'Din - Israel Union for Environmental Defense, is that the gas for export may be produced at floating liquefaction installations, which do not yet exist anywhere in the world, and this will make it difficult to determine a normative construction cost for such an installation.

The Tamar field developers plan to export gas from the reserve by means of a floating liquefaction installation (FLNG), and have even signed a memorandum of understanding with Russian company Gazprom for the sale of gas. However, the wording of the draft government resolution indicates that Tamar will be permitted to export 50 billion cubic meters (BCM) at most. The Tamar reserve currently contains 280 BCM, of which 180 BCM have already been sold to Israeli customers. Minister of Energy and Water Resources Silvan Shalom requires Tamar to lay an additional pipeline to the Israeli coast before it will be allowed to export gas. After laying the pipeline, Tamar will be allowed to export up to 50% of the remaining quantity (50 BCM), subject to the Israeli economy being assured of at least 540 BCM in total. Energy industry sources estimate that the implication of these conditions is cancellation of the gas export venture, at least in its current format.

Published by Globes [online], Israel business news - - on June 20, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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