Yacimovich demands answers to Teva's low tax rate

Labor chairwoman Shelly Yacimovich demanded a discussion in the Knesset Finance Committee and answers from the Finance Ministry after Teva Pharmaceuticals reportedly paid a 0.3 percent tax rate on its activity in Israel.

“Explain if it’s correct that a company earning NIS 1.5 billion pays a tax rate of zero, while 90% of the companies pay an average tax over 20%,” Yacimovich wrote in a formal query to the Finance Ministry, in which she also requested to examine the company’s past tax assessments to ensure they were correct.

The ministry did not immediately respond to requests for comment.

The outrage came in response to a Globes assessment that pegged Teva’s 2012 Israeli taxes at $5 million. Over the last decade, it found that Teva paid $1.9b. on worldwide profits of $17.2b., an average effective rate of 10.7%. For its Israeli operations, it paid $787m. in taxes on $14.2b. in profits, an effective tax rate of 5.6%.

How does a company get such a low tax rate? As Teva explains in its SEC filing, there are several benefits that help it out. Its classification as an “industrial company” lets it deduct up to 12.5% from certain acquisitions and patents and claim special depreciation rates of up to 40% on industrial equipment.

As an approved enterprise, which the government deems is “expected to contribute to the development of the productive capacity of the economy, absorption of immigrants, creation of employment opportunities,” it also can opt for tax exemptions instead of government grants.

The company gets further breaks for its designation as a foreign investors company and for operating factories in the country’s periphery.

In its annual filing, the company also noted that it was considering paying a onetime tax of $700m. to take advantage of a regulation intended to free “trapped profits.”

Trapped profits refers to earnings that a company chooses not to pay out to investors as dividends because of high taxes. The regulation allows approved enterprises to pay a one-time fee and disperse the dividends at a lower rate. Globes estimated Teva’s trapped profits at around NIS 40b. in May.