Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) is not satisfied with the huge tax breaks it has received, and continues to receive, in Israel, but is putting heavy pressure on members of the Knesset Finance Committee, especially MKs from Yesh Atid and the Labor Party, as well as on top government officials, to neutralize plans by Minister of Finance Yair Lapid and the Ministry of Finance to reduce tax breaks for companies in the periphery under the Law for the Encouragement of Capital Investment.
For years, Teva has topped the list of corporate tax breaks, receiving NIS 11.77 billion in breaks in 2006-11. It has benefited for years from its status as "strategic investor", eligible for zero taxes, and it also tops the list of corporations with trapped profits, amounting to tens of billions of shekels.
In a stormy Finance Committee meeting on Monday, Israel Tax Authority director general Moshe Asher, State Revenues Administration director Michael Sarel, and Deputy Budget Director Yoni Regev outlined the basis for the decision to raise the companies tax on enterprises which benefit from Law for the Encouragement of Capital Investment.
Under the declining tax structure in the new Law for the Encouragement of Capital Investment, which came into effect in 2011, a 10% tax rate was levied in 2012 on export-oriented enterprises in the periphery, and a 15% tax rate on such enterprises in central Israel. In 2013, the rates will fall to 6% in the periphery and 12% in central Israel.
But in the two years since then, a few things have happened. Slowly, the true figures of the profligate tax breaks awarded to big corporations and the negligible tax rates have been disclosed; the Trajtenberg Committee stopped the process of cutting the individual income tax and companies tax rates; the Ministry of Finance admitted that the sharp drop in tax revenues contributed to the huge budget deficit; and the Netanyahu enacted two big tax hikes in July 2012 and again a few months late.
As a result, a few months ago, Lapid announced that the Ministry of Finance would stop the companies tax reduction in the Law for the Encouragement of Capital Investment, and would set the rate at 10% for export-oriented enterprises in the periphery and at 15% for these enterprises in central Israel. This is also the ministry's proposal in the 2013-14 Economic Arrangements bill, which the government has approved and which the Knesset is now debating.
After days of talks between Teva officers and some MKs, Teva director Chaim Hurvitz (the son of the late Eli Hurvitz, and one of the company's major shareholders) yesterday told the Finance Committee about growing competition for Teva factories, and Teva's preference for building factories in Israel's periphery, which will now have to be reconsidered, and the company's decision to build a plant for inhalers in Jerusalem on the basis of the 6% tax rate. Most of all he talked about the so-called "danger" in narrowing the tax gap between Israel's center and periphery. He was accompanied by an entourage of mayors, including Jerusalem Mayor Nir Barkat, and union representatives, and central party councilmen from the periphery.
"We understand the directive," said Hurvitz, "but the moment the Ministry of Finance narrows the gap and raises the tax rate, every calculation by the company, both between Israel and other countries, and between Israel's center and periphery, will be reviewed."
Some excited and panicky MKs suggested to the Ministry of Finance to lower the 10% companies tax rate in the periphery to 7.5% or 8.5%.
Published by Globes [online], Israel business news - www.globes-online.com - on July 16, 2013
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