Steinitz: Approve ‘trapped profits’ proposal

Finance Minister Yuval Steinitz on Thursday urged the Knesset Finance Committee to approve a government proposal to release “trapped profits” of multinational corporations. The only alternative would be to collect more taxes from the public, he said.

Steinitz estimated the legislative amendment would boost state coffers by NIS 3 billion next year. But opposition MKs accused him and the government of delivering tens of billions of shekels in benefits to the companies.

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 proposed amendment, these corporations would be permitted to release their trapped profits by agreeing to pay a reduced company tax rate.

The companies would be required to distribute 40 percent to 70% of their trapped profits, with the tax rate reduced according to how much they distribute. The dividend-withholding rate would remain at 15%.

Defending the proposal, Steinitz said it would guarantee the state a new source of revenue where previously there was nothing. He estimated that from the years 2005-12 the state collected less than NIS 600 million from the corporations in question – a far cry from the estimated NIS 120 billion to NIS 125b. in trapped profits they have accrued.

The finance minister said the amendment would help the state stand by the 2013 budget deficit target of 3%. “It is preferable to collect these revenues from companies and not from regular citizens,” he said. The Treasury is making an effort not to exceed a deficit of 3.9% this year, he added.

Israel Tax Authority director Doron Arbeli said the existing law enables large companies to obtain tax exemptions as long as they do not pay dividends.

Companies had found three ways to exploit this clause – not all of them legal, he said.

Firstly, 36% of corporations refrained from distributing their profits, and therefore the amount they were taxed was negligible, Arbeli said. Secondly, some companies transferred profits to subsidiaries, causing them to face legal action from the ITA, which believes this to be allocation of dividends.

Thirdly, some companies have not reinvested their profits, and “the state has not seen one shekel from them,” he said.

Finance Committee chairman Moshe Gafni called the proposal “a not-so-simple dilemma.” On the one hand, he said, it would mean allowing more concessions for large corporations that already enjoy tax exemptions.

But on the other hand, it would provide a source of taxation revenue that was not previously utilized.

Opposition MKs spoke against the amendment, including representatives from Kadima, Labor, National Union, Meretz and Hadash.

Labor chairwoman Shelly Yacimovich asked, “What should the idiots who obeyed the law and paid their taxes on time be thinking now? That they are the suckers? That they are stupid?” She also rejected the notion that collecting this revenue immediately is more important than charging all companies the same amount, telling Steinitz that he and the government must stop thinking of the short term.

“Just a little patience is needed, that’s all,” Yacimovich said.

Meretz leader Zehava Gal-On accused Steinitz of “approving robbery of the public purse and requiring the Finance Committee to act as the rubber stamp.”

She said his proposal encouraged inequality under the law, saying: “In these days of out-of-control deficit and cuts to social services, [Finance] Minister Steinitz is giving up on tens of billions from companies that owe the state money.”