Foreign-currency speculators to be taxed

By SHARON WROBEL
January 27, 2011 22:58

Finance Ministry plan would tax foreigners’ profits on short-term government bonds.

2 minute read.



New Israeli Shekels

Money Shekels bills 521. (photo credit: Courtesy)

The Finance Ministry plans to cancel tax exemptions for foreign investors on profits on short-term government debt in an effort to stem the sharp appreciation of the shekel and drive speculators out the market.

“There is concern that players in the foreign-currency market are abusing the tax exemption to make quick profits,” the Finance Ministry said in a press release Thursday.

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“The cancellation of the exemption, which is subject to legislative approval, is expected to somewhat reduce the attractiveness for foreign residents to buy Makams [shortterms bills issued by the Bank of Israel] and short-term government bonds and in turn reduce the purchase of shekels, thereby weakening the local currency.”

Following the announcement, the shekel weakened 1.5 percent and closed at NIS 3.656 per dollar.

Last year, the shekel strengthened 6% against the dollar, hurting exporters’ profits.

Foreign residents have been exempted from paying taxes at a rate of 15% on profits from investment into Makams and short-term government bonds issued by the accountant-general. The exemption was granted to encourage foreign investment into the local capital market.

“The shekel strengthened over the last few years mainly as a result of the strength of the economy and its resilience to the global economic crisis,” the Finance Ministry said. “However, recently, in addition to foreign investments into the economy, which are welcomed, we are seeing a sharp increase in the inflow of foreign currency by investors who are taking advantage of the interest-rate spread between Israel and abroad to make quick short-term gains, as well as other reasons. This situation is causing the shekel to appreciate, which in turn is likely to hurt the long-term competitiveness of the economy.”

The Bank of Israel on Monday raised the base lending rate by 25 basis points to 2.25%, while central banks in the majority of developed countries have left rates at near-zero levels.

“The decision taken by the Finance Ministry was not entirely unexpected and could have an impact in different directions,” Amir Kahanovich, chief economist and market strategist at Clal Finance, said in a report Thursday. “It involves a tax on profits, and if foreign investors can still make a profit at a minimal risk, the impact of the annulment of the tax exemption might be low.

“Revoking the tax exemption is likely to reduce demand by foreign investors for the shekel and local bonds, which in turn will weaken the local currency and raise bond yields, especially if this allows the Bank of Israel to increase interest rates at a faster pace. In a different scenario, state revenues could be boosted by the new tax and from income of increased export activity, which in turn would lead to a reduction in government debt and have an adverse effect of supporting the currency.”

The Treasury’s decision follows last week’s measures announced by the Bank of Israel to tighten regulations on foreign-exchange activity.


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