Sheshinski 2 backpedals; Israel Chemicals still unhappy

Eytan Sheshinski, Yair Lapid
Eytan Sheshinski, Yair Lapid

Minister of Finance Yair Lapid: The committee has created the right balance; Israel's natural resources belong to the public.

The Committee for the Review of Policy with Respect to Royalties on Natural Resources, or by its shortened name the Sheshinski 2 Committee, submitted its final report to Minister of Finance Yair Lapid today. Under the report's recommendations, the government take from Israel Chemicals Ltd. (TASE: ICL) will total 48%, which compares with 53% in the committee's interim report. In financial terms, the difference is about NIS 100 million.

At a press conference convened by the Ministry of Finance, committee chairman Prof. Eytan Sheshinski explained that the principle that guided the committee was progressiveness. Udi Adiri, deputy director of the Ministry of Finance Budget Department, who coordinated the work of the committee, said, "If there is a decline in potash prices, there could arise a situation in which the state's revenue will shrink, but, looking at the general picture, taking into account bromine and phosphates as well, I don't see a situation in which the total will be smaller."

Adiri added, "The principle of progressiveness that guided us means that if companies make large profits, the public receives a lot of money, and if their profits are small, the public receives less." He pointed out that application of the Sheshinski model to potash prices in 2008 would have yielded the state revenues of NIS 1.8 billion, whereas today, after the plunge in potash prices, the model will yield only NIS 400 million.

"We don't want to hurt enterprises and workplaces and we need the economy to continue to be attractive to investors," said Lapid at the press conference, "But our task is to create a fair game here in which the money does not remain with a few wealthy magnates but also reaches the public. This is what the committee was asked to do, and this is what the committee has done. Anyone with complaints about the outcome should ask themselves what there was before. The answer is nothing. The committee has created the right balance. Israel's natural resources belong to the public, and the public should benefit from them."

Israel Chemicals said in a statement today, "The minister of finance must understand that adopting the report's recommendations will make him responsible for the severe outcome for unemployment, for a social, human and industrial crisis in the Negev, and for a severe blow to the Negev and the economy in general."

If the recommendations of the Sheshinski 2 Committee are implemented, Israel Chemicals will actually pay the state less than it does at present, if its operating profit margin is below 13%, according to the presentation given by the committee today. If, however, Israel Chemicals' operating profit margin rises above 13%, the government take will be higher than it is now.

Three senior government submitted a minority report calling for further concessions to Israel Chemicals. The three are Ministry of the Economy director-general Amit Lang, Orna Hozman-Bechor, director general of the Ministry of National Infrastructures, Energy and Water Resources, and the director of the Natural Resources Administration at the ministry, Yossi Wurtzburger.

The Sheshinski 2 Committee (Sheshinski 1 was on the government take from gas discoveries) did not hide its preparedness to soften its interim recommendations, given the fear of a severe blow to Israel Chemicals plants that provide jobs for thousands of families in the Western Negev and the Arava in the south of Israel. Israel Chemicals announced that it would close its magnesium plant on January 1, 2017, the day the fiscal changes that the committee recommended would be due to come into force, and also announced a streamlining plan at Bromine Compounds involving the layoffs of hundreds of workers.

The committee estimates that the financial consequence of the changes that have been introduced to the recommendations is a reduction in the state's expected revenue of 20-25%, or about NIS 400 million annually.

The government take from the profits of Israel Chemicals and other extractors of natural resources (chiefly copper) will henceforth be 42-56%. This is made up of a 5% royalty on turnover, Companies Tax of 26.5%, and a new levy of 25-42%. The reason that the total is lower than the sum of the three elements is that the royalties are imposed on sales rather than on profits, and are recognized as an expense for the purposes of calculating the levy, while the levy itself is recognized as an expense in calculating Companies Tax.

The most significant change that the committee made to its interim recommendations is the splitting of the surtax to be imposed on mining products into two bands. Instead of a 42% tax, a graduated tax will be imposed. The first level will be 25%, and the second 42%. Another important change is the raising of the guaranteed return for natural resources producers from 11% in the interim report to 14%. The profitability figures for calculating the tax will be taken from the producers' financial statements.

The committee also took steps to reduce the harm to factories making derivative products based on Dead Sea minerals extraction. So, for example, Companies Tax will continue to be levied at a reduced rate of 9% on such plants, headed by the magnesium plant and Bromine Compounds. To implement this, the government will probably have to amend the Income Tax Ordinance in addition to the special law on taxation of natural resources that will be required if the government decides to adopt the committee's recommendations.

The committee also adopted individual arrangements for mining products used by Israel Chemicals. A mechanism was devised for Bromine Compounds that will ensure low transfer prices for compounds produced in Israel, enabling Bromine Compounds to benefit from reduced taxation as long as it operates in Israel.

Another creative arrangement was formulated for the magnesium plant. The cost of producing sylvanite, a material similar to potash that is a by-product of magnesium production at the plant, will be recognized as an expense of the potash plant that buys the sylvanite from the magnesium plant. The result is that the potash plant will enjoy a tax benefit as long as the magnesium plant remains, providing an incentive for Israel Chemicals to keep it operational.

Published by Globes [online], Israel business news - - on October 20, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

Eytan Sheshinski, Yair Lapid
Eytan Sheshinski, Yair Lapid
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