Ministry of Finance director general Shai Babad has intervened in the negotiations over the collective labor agreement at Israel Electric Corporation (IEC) (TASE: ELEC.B22) in an effort to break the deadlock. Sources inform "Globes" that at a meeting in the Ministry of Finance last Thursday attended by senior staff at the ministry and the Israel Tax Authority, Babad said that if the Tax Authority did not issue a pre-ruling within a week making it possible to avoid recognizing provisions for pensions as a tax event, the state would initiate legislation in the matter. Sources present at the meeting said that Babad ruled out the possibility that the state would fail to meet its obligations to pay the workers the agreed pension supplements.
Up until now, the possibility of legislation has not been seriously considered because of concern that a special law granting a tax exemption to IEC workers would arise great public criticism, while the chances of its being passed by the Knesset appear poor.
The proposal now under consideration by the Ministry of Finance, however, differs from the original solution. The bill under consideration changes the general taxation rules for all pension provisions in collective agreements. Ministry of Finance legal advisor Adv. Adi Messing, who is behind the demand for such legislation, believes that an exemption can be granted to workers for provisions for their pensions, provided that they do not withdraw the money before reaching pension age. This means that if workers withdraw the money before reaching pension age, they will be assessed retroactively at the rate that would have applied at the time the provision was made.
Sources involved in the negotiations said that support for such a proposal could be obtained from the Histadrut (General Federation of Labor in Israel), in which case there would be a reasonable change that the bill could be voted into law at the upcoming Knesset session.
High income cut in pensions
Last Wednesday, "Globes" revealed that concern existed that the IEC reform would collapse, in view of the deadlock reached in the negotiations on tax benefits for IEC workers involving the pension supplements promised to them.
In the collective agreement signed by IEC workers and the state in May 2018, the state undertook to increase the monthly pension of workers active in the company on the date the agreement was signed by NIS 1,700 per month when they retire. The 2,200 IEC workers scheduled to retire from the company or move to other companies to be founded were promised a NIS 1,200 monthly pension supplement. The budgetary cost of these additions was estimated at NIS 5 billion, which the company is due to pay over a number of years into the active workers' pension fund. Financing for this amount is due to come from savings made by reducing IEC's permanent staff by 1,800 jobs by 2025.
Shortly before the agreement was signed, however, a difficulty arose that threatened to thwart the agreement. The Tax Authority, which joined the negotiations at a late stage, announced that the amounts to be provided to the workers' pension savings would be taxed on the date on which they were deposited. IEC workers committee chairperson David (Miko) Zarfati announced that the collective agreement would not be valid if a 46% marginal tax rate, which would almost halve the pension supplement promised to the workers, was applied on the deposit date. For his part, Messing said that any arrangement stipulating that the amounts provided for the workers' pension insurance would not be considered a tax event had to be anchored in legislation because it contravened the principle of equality.
In order to enable the agreement to be signed, it was agreed that a suspending condition would be added stating that the agreement's validity was conditional on a pre-ruling by the Tax Authority stating that the amounts provided for pensions would not be considered a tax event. The Tax Authority and the IEC workers' committee have been trying to find a solution that would allow the suspending condition to be fulfilled without legislation. It appears, however, that these attempts have bogged down. In any case, no pre-ruling has been issue.
Two alternatives unpalatable to the state
If no solution is found to the problem, the state will face two very bad alternatives. One is canceling the collective agreement, as Zarfati is threatening, which will torpedo the entire reform, because the other parts of the reform are contingent on the IEC workers' cooperation. The other possibility is saving the agreement by increasing the pension supplement for workers to make up for the tax. This solution would have to be financed through an increase in the electricity rate for consumers.
The Ministry of Finance said, "If the pre-ruling process in the Tax Authority is not completed, a legislation will be promoted to enable the state to fulfill its commitments in any case."
Published by Globes, Israel business news - en.globes.co.il - on October 28, 2018
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