The imposition of an excess profits tax on Israel Chemicals Ltd. (NYSE: ICL; TASE: ICL) does not constitute a violation of the franchise agreement between the company and the state, and does not require the appointment of an arbitrator, the Jerusalem District Court ruled. The Court almost totally accepted the state's position, argued by Deputy Attorney General Avi Licht. The Court ordered Israel Chemicals subsidiary Dead Sea Works to pay NIS 50,000 in court costs, and ruled that the only way ICL, a subsidiary of Israel Corporation (TASE: ILCO), could take action against the Sheshinski Committee's recommendations was by petitioning the High Court of Justice. These rulings do not constitute a ruling on the actual substance of Israel Chemical's petition.
Dead Sea Works petitioned for the appointment of Adv. Moshe Shahal as an arbitrator on the issue of increasing the public's share of potash and bromine mining. In a petition filed through Adv. David Tadmor, Dead Sea Works asserted that the state was obligated to submit the issue to arbitration, as stipulated by the Dead Sea Franchise Law. In addition, Dead Sea Works asked that the state be held responsible for compensating the company for all monetary damage suffered, and suffered in the future, as a result of a change in the payments regime established in the franchise.
In a hearing on the substance of the petition, however, Judge Ben Zion Greenberger accepted the state's argument, ruling "At the current stage of the committee's activity, no grounds have arisen on which Dead Sea Works' demand for appointment of an arbitrator can be based, and the claim is therefore premature and theoretical." The judge commented, "In a properly run democratic country, not every argument will be accepted as if a government examination of any issue on the national agenda could in itself create grounds for a claims of some damages - even if these damage were actually caused." The judge added that even if the excess profits tax is eventually imposed on Dead Sea Works, there was still no certainty that this would lead to definite damages, because together with levying the tax, the state was likely to grant benefits to compensate the company, and perhaps even completely offset the economic damage caused as a result of the increase in royalties. The judge made an interesting distinction in this context between taxes and royalties, because royalties concern the company's revenue from the use of natural resource, and are not related to its profits. The Sheshinski 2 Committee interim report, published in May, recommends levying a 42% excess profits tax on minerals mined by Israel Chemicals from the Dead Sea and a uniform 5% royalty rate starting in 2017, according to a model that will guarantee Israel Chemicals an 11% return on its assets.
The tax is designed to increase the state's share of Israel Chemical's revenue to 46-57%. The Committee recommended that the tax be calculated according to a model based on the accounting profit and loss statements, and that the tax be charged after the company is guaranteed an 11% return on its assets.
The 42% tax will be collected annually, and will constitute an additional tool in the array of taxes, which includes royalties and corporate tax. The Committee is recommending that excess profits tax be levied on Israel Chemicals starting in 2017, not when the bill is approved, in order to give the company time to adjust.
Israel Chemicals said in response, "Israel Chemicals is studying the judgment."
Published by Globes [online], Israel business news - www.globes-online.com - on October 1, 2014
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