Sovereign wealth fund won't operate before 2020

Tamar Photo: Ben Yoster

Original estimates were that Israel's sovereign wealth fund from the revenues of natural resources would be established this year.

The sovereign wealth fund will not go into effect before 2020. Sources inform "Globes" that the Bank of Israel, which is responsible for setting up the fund, has suspended its work on it, due to its irrelevance in the coming years. At the same time, a revision of the Israel Tax Authority's revenue forecasts shows that the minimum amount for activating the fund will not accumulate before 2020, compared with mid-2019 in the previous forecast. The sovereign wealth fund is to begin operating when the state accumulates NIS 1 billion in revenue from the excess profits on tax natural gas reservoirs and other natural resources in Israel.

When the law for establishing a sovereign wealth fund passed, it was believed that the fund would go into operation as early as 2018. After revenues from taxes on Israel Chemicals' (TASE: ICL: NYSE: ICL) business were added to the fund, the forecast for its establishing was moved forward to 2017. Approval of the natural gas plan, however, delayed the obtaining of tax revenues from the reservoirs by a few years,, and in recent months, it turned out that tax revenue from ICL is not guaranteed, either.

The recent developments that led the Tax Authority to revise its revenues forecasts again were lower-than-expected gas prices in recent agreements with private customers for the Tamar reservoir and the fact that the volume of sales of gas from Tamar rose more slowly that the rate on which the original demand forecasts were based.

NIS 4 billion by the end of the decade

According to a simulation conducted in 2015 by Dr. Adi Brender, head of the Macroeconomics and Policy Division in the Bank of Israel Research Department, NIS 4 billion should have accumulated in the sovereign wealth fund by the end of this decade. The source of the fund's revenue is the excess profits tax of up to 50% on the natural gas reservoirs, as recommended by the Sheshinski 1 Committee, and a 42% excess profits tax on other natural resources, as recommended by the Sheshinski 2 Committee.

The big problem for the state is that the revenues are absolutely contingent on the profits of the ventures. The gas developers will begin paying tax only after they make back 150-230% of their recognized investment in development of the reservoirs. In the framework of the gas plan, the state allowed the Tamar partnerships to make additional drillings in order to increase the quantity of gas that will be supplied to the economy. In practice, this has delayed the date on which the partnerships will start paying taxes by two years. In the case of Israel Chemicals, the state agreed that the company would pay tax only on profit in excess of an 11% return on capital, thereby linking tax revenues to global potash prices. Beyond exogenous factors and actions approved by the government, the excess profits tax is also exposed to creative tax planning by the developers liable to appear later, which could further postpone the date on which operation of the sovereign wealth fund will begin.

It is important to note that in addition to the excess profits tax, the state also charges a 12.5% royalty on gross natural gas sales and a 5% royalty on sales of other natural resources. These royalties, which are not contingent on the developers' profits, have so far generated NIS 6 billion in aggregate revenues, according to Minister of National Infrastructure, Energy, and Water Resources Dr. Yuval Steinitz. Revenue from royalties, however, is not designated for the sovereign wealth fund; it is used for the regular state budget.

Published by Globes [online], Israel Business News - www.globes-online.com - on February 15, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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Tamar Photo: Ben Yoster
Tamar Photo: Ben Yoster
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