The tax rate on profits of private oil and gas companies drilling offshore will rise from less than 30 percent at present to between 52% and 62%, according to the final recommendations presented by the Sheshinski Committee on Monday.
The committee’s recommendations mark an easing of the tax burden from the 66% it had suggested in its interim report two months ago. The change follows intensive pressure from the private companies, including Givot Olam, Noble Energy, and Ratio Oil Exploration, firms that have recently found gas reserves potentially worth hundreds of billions of dollars in Israeli waters.
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“In most countries throughout the Western world, the tax laws pertaining to gas and oil have been changed many times since the 1950s, including in the past two decades. In Israel, nothing happened, and as a result we are today the country with the lowest government take,” Finance Minister Yuval Steinitz said at a press conference in Jerusalem.
“We are making a correction, as was done in other Western countries, so that the public will get to share its deserved benefit from natural resources,” he said. “One cannot overstate the importance of these gas discoveries for our future, for our ability to continue to finance our defense, and for our ability to ensure the highest levels of education of our sons and daughters in the near future.”
The members on the committee headed by Prof. Eitan Sheshinski include National Economic Council head Eugene Kandel, National Infrastructures Ministry director-general Shaul Tzemach, ministry petroleum commissioner Dr. Ya’acov Mimran, Tax Authority director Yehuda Nasradishi and Finance Ministry budget director Dr. Udi Nissan.
Steinitz praised the committee not just for its professional and dedicated work, but also for admirably working under the difficult pressure exerted on it from the day it was established – in particular, the campaign of pressure and intimidation directed personally at Sheshinski and his family.
“We live in a democratic country, and I understand the interests of exploration companies and their need for expression and persuasion, which are legitimate, but here red lines have been crossed,” Steinitz said. “Because of powerful economic interests, we are getting close to a situation in which it is difficult to take decisions.”
Partially backing down to pressure from exploration companies and small investors, the final recommendations include a number of adjustments to the interim recommendations presented in November.
“We made the changes following dialogue and discussion with companies and different sides involved in the oil and gas sector to bring government take to a level that compares with the average level in most OECD member countries,” Sheshinski said at the press conference.
According to the final recommendations, a progressive tax would be levied on part of the gas and oil companies’ profits, after they recouped 150% of their investment on the gas field projects. The tax rate would range from 20% to 50%, depending on the volume of the profits, which is less than the maximum rate of 60% recommended in the interim report.
“We also decided to recommend a gradual implementation of the new tax regime and include an interim period during which the government take from the oil and gas reserves will be in a range of 43% to 59%, below the level of comparable countries in the world,” Sheshinski said.
The Sheshinski Committee did not give in to the demand by National Infrastructures Minister Uzi Landau to exclude the Tamar offshore gas discovery from the final recommendations, but it included tax breaks for reserves that begin gas production no later than January 1, 2014.
On these reserves, taxes will be levied only after a 200% return is received on the investment in exploration and development. The Tamar gas discovery, which is estimated to meet Israel’s energy needs for the next two decades, is slated to begin it first commercial gas sales in 2013.
“The final recommendations presented confirm that in three years, gas will not be delivered to Israel,” Landau said. “The committee has not taken a calculated risk, but a dangerous gamble. Private electricity producers are already turning to gas from Egypt.”
Landau has argued that levying the new gas tax regime on the Tamar site retroactively will impair development of its natural gas reserves and delay the delivery of gas to Israel.
“I am confident that energy exploration companies will continue to proceed with their exploration activities,” Steinitz said.
Over the next few days, the final recommendations will be presented to Prime Minister Binyamin Netanyahu, after which they will be presented to the Knesset for approval.
“The corrections made by the committee are a move in the right direction, but they are not enough,” Ratio Oil Exploration said in an official response. “They are only recommendations, and we expect the government to take responsible decisions to secure the future of the energy market in Israel and for the benefit of the public. The government needs to send a clear message to anyone who is today considering entrepreneurial initiatives that require vision and firmness for decades.”
Energy exploration companies have staged a battle in recent months against the adoption of a new tax levy, arguing that they have spent years and billions of dollars exploring in Israel and its territorial waters and that any change would constitute a breach of contract and scare off future investors.
Charles Davidson, chief executive of Noble Energy, said that his company
“has not yet had the opportunity to evaluate the full impact of the
committee’s recommendations, but remains opposed to changes to fiscal
terms for fields discovered prior to establishment of the committee such
as the Tamar site.”
In the statement, Noble Energy – which together with its Israeli
partners has made three significant natural gas discoveries off Israel’s
shores, including the Tamar and Leviathan prospects – said that the
average government take from natural resources in OECD countries was
“Noble Energy fails to understand why Israel’s government take should
exceed that of the United States and the United Kingdom, where gas
markets are much more robust and developed than that of Israel,”