The Sheshinski II Committee will recommend a surtax on downstream bromide products - a major change in the new draft published by the Ministry of Finance today, compared with the previous draft, published last week.
The Sheshinski II Committee decided to adopt the surtax method (a surtax on a return of over 11%), but the Ministry of Finance greatly feared that Israel Chemicals Ltd. (TASE: ICL), known for its aggressive tax planning, would succeed in evading the surtax by selling its products to affiliated companies at low prices, which would be the basis for collecting the tax.
Last week, Accountant General Michal Abadi-Boiangiu led a tough very line that was totally at odds to the position of Sheshinski II Committee chairman Eytan Sheshinski. She demanded a meeting with Minister of Finance Yair Lapid, in which she outlined the problem of downstream products, which would allow "a syphoning off of excessive profits", in the words of the committee report. Taxing downstream products (the sale of products to Israel Chemicals affiliates) is at the heart of the arbitration between the State and Israel Chemicals. The main problem with bromine - a critical product for which there is no clear market price - the necessary figure for calculating the surtax. Worse, Israel Chemicals is the most influential player in the market as the world's largest bromine producer.
The Sheshinski II Committee found that there are resources for which the market prices are difficult to calculate because of the industry's market structure and the lack of a global index for setting the market price. These resources include bromine, which is mainly sold to subsidiaries or affiliated companies that manufacture or sell downstream products. There is considerable concern that it is impossible to set transfer prices in a way that will guarantee no leakage of extra profits to these companies.
The committee therefore plans to consider this key issue in subsequent discussions and review which supplements and changes are needed to deal with this key problem. The options that will be considered include setting a resource price "that takes into account the price of the compound or another method to be determined," states the report.
The proposed change will greatly boost Israel Chemicals' transfers to the government, reportedly amounting to hundreds of millions of shekels a year. The government's take from natural resources alone will increase by NIS 500 million a year when the recommendations are approved. The Sheshinski II Committee recommends levying uniform royalties of 5% on natural resources, excluding oil and gas. The current royalties rate is 2-10% of the value of the quarried material (after legally mandated deductions).
The committee also recommends that the Israel Tax Authority closely track the basic price of bromine.
Deputy Budget Director Uri Adiri said in response, "There was no dramatic change in the bromine issue. The change is cosmetic and marginal."
Published by Globes [online], Israel business news - www.globes-online.com - on May 18, 2014
© Copyright of Globes Publisher Itonut (1983) Ltd. 2014