Knesset Committee approves ‘trapped-profits’ bill

The Knesset Finance Committee on Sunday approved the second and third readings of a government bill to release “trapped profits” of multinational corporations. The move is expected to boost government coffers by NIS 3 billion next year.

Until now, the Law for the Encouragement of Capital Investment has exempted certain multinationals from paying company and dividend taxes as long as they invest their profits in further activities in Israel.

Under the bill, corporations will be permitted to release part of their trapped profits for investment abroad as long as they agree to allocate at least half of the profits to investments inside Israel. In return, the state will charge them a reduced company tax rate of 6 percent to 17.5%.

Finance Committee chairman Moshe Gafni (United Torah Judaism) said the measure would change the existing situation in which no government from any side of the political spectrum could touch the multinationals’ profits. He estimated that the companies had withheld NIS 120b. from the state since the introduction of the original law to encourage capital investment.

Finance Minister Yuval Steinitz praised Gafni for “displaying maturity and responsibility” by assuring the bill passed in the face of “populist criticism.” Particularly now, he added, it is vital to make practical decisions and to continue to safeguard the Israeli economy for the benefit of its citizens.

Tax Authority director Doron Arbeli said the committee’s decision and the consent of corporations to invest half their profits in Israel have created “a correct and fitting combination.”

Deputy Attorney-General Avi Licht backed the bill, but said multinational corporations’ profits had never truly been trapped. Over the years corporations had redistributed a portion of their profits through subsidiaries abroad, he said, and the Israel Tax Authority has been unable to keep track of the magnitude.

Among the opposition voices, Labor chairwoman Shelly Yacimovich said she could not understand why the government rejected the path suggested by her and by the industry, trade and labor minister, which would have provided incentives for companies to reinvest profits inside Israel. The 50% corporations will be required to invest in Israel under the amendment is not sufficient, she said, recommending that it be raised to at least 70%.

Meretz leader Zehava Galon said those who were already paying tax to release profits were “suckers.” Calling the bill “government-assisted money laundering,” she said it gave preference to immediate cash flow without taking into account the long term.

Kadima, Yisrael Beytenu and Hadash MKs also criticized the bill, with MK Shlomo Mollah (Kadima) questioning how the government could consider NIS 3b. out of a total NIS 120b. sufficient when the cost of living is still rising and more public-expenditure cuts are still being considered.