4 companies get 70% of capital investment benefits

The four largest companies in Israel, Teva, Intel, Israel Chemicals (ICL) and Checkpoint, will pay an effective tax rate of 3%.

May 5, 2013 14:11
Yair Lapid makes first speech before Knesset, Feb 11

Yair Lapid 370. (photo credit: Marc Israel Sellem/The Jerusalem Post)

The four largest companies eligible for capital investment tax credits received 70 percent of the NIS 5.6 billion in benefits in 2010, and paid an effective tax rate of 3.3%, according to a Finance Ministry report released Sunday.

Though they were not named in the report, a Calcalist analysis pegged the four lucky companies referenced in the study as Teva Pharmaceutical Industries, Intel Israel, Israel Chemicals and Check Point Software Technologies, which represented the top 1% of the 440 companies examined in the report.

Even as the corporate tax rate steadily declined from 36% to 25% during the seven-year period of the study, which only examined companies eligible for capital investment benefits, the amount of benefits paid out more than doubled, from NIS 2.3b to NIS 5.6.

The profits of the four companies in the top percent rose from 3.2b in 2003 to 18.2b in 2010, while the percentage of their income that was nontaxable rose from 17% to 77%. Their 70% share of capital investment incentives in 2010 was up from 32% in 2003.

While the effective tax rate paid out by the bottom 10% of the eligible companies remained stable at 20.8%, the companies in the top decile’s rates fell from 15.2% to 10.5%, and those in the top 1%’s rates fell from 16% to 3.3%.

The report’s author said that despite a 2011 amendment to the Law for the Encouragement of Capital Investment meant to address inefficiencies such as overconcentration, the trend was not set to change.

The law doles out grants and tax breaks to companies that make capital investments (such as in factories or machinery) or invest in research and development, giving more to businesses that set up shop in the periphery.

Although Amendment 68, as it was known, enacted minimum corporate taxes of 6% for companies in the Center and 12% for companies in the periphery, it also grandfathered in prior tax benefits.

“The change was meaningful in that there’s no more 0% tax for the deferred profits,” said Isak Rofe, tax partner at Crowe Horwath (Israel) Ovadia Pick Kriheli & Co. “The reason we don’t see an effect yet is the transition clause, which says that for anything put in place until 2012, you can still apply the old rules.”

Companies that made investments with 10- to 15-year tax incentives will continue to enjoy those benefits until they expire, so the law’s effects will not fully be felt for more than a decade. The report’s author concluded that the amendment did not go far enough, and “a new examination of the law is necessary.”

Israel Chemicals, however, said the changes to the law had made a big difference for its eligibility for breaks.

“ICL, and ICL alone, was excluded from the capital investment encouragement law from the end of 2010, so in 2012, ICL paid 15% tax, and the tax benefits that the company got came out to $121m., significantly lower than our tax payments this year,” a spokesman said, adding that it expected its tax rate to rise to 25% in the coming years.

Teva simply said that it had paid all the taxes for which it was legally obligated, while Intel and Check Point declined to comment.

Opposition leader Shelly Yacimovich (Labor) said the report exposed a “difficult and totally twisted picture of the distribution of benefits in a reckless and unjustified way to a small group of corporations.

“In a few weeks, the finance minister will put a heavy VAT on all of the poor and middle-class people, together with budget cuts, while, just like his predecessors, he defends the larger pool from which he can take taxes,” Yacimovich added.

According to the Labor chairwoman, the state’s revenue from increasing value-added tax by 1 percentage point is similar in total to the tax benefits that the four corporations receive.

“Lapid asked ‘Where’s the money?’ [in his election campaign] and it turns out that the answer is gathering dust in his desk drawer,” she said. “There is no doubt that the report was intentionally hidden before and after the election.”

MK Issawi Frej pointed out that Lapid and his party call for equality in the burden of national service, and said there should be equality in the tax burden.

Frej, who was an accountant before being elected to the Knesset, said that he saw many small and medium businesses suffer from high taxes, and expressed outrage at seeing the large benefits given to major corporations.

“These are important companies that should be encouraged, but this is beyond encouragement. This is the government bowing down to corporations.

The finance minister must change the law to bring equality in the burden between large corporations and small and medium businesses,” he said.

“I support increasing the deficit as the finance minister decided to do, but only on condition that corporations will take part in covering the deficit when the time comes for them to pay,” Frej said. “It’s very nice to cancel cuts now and gain adoration from the public, but if the working man will pay the price in the end, then it makes no difference.”

Meretz chairwoman Zehava Gal-On called the numbers “incredible” and said the four companies and their lobbyists had threatened for years to leave Israel if their taxes were raised.

“The big lie was exposed today. It turns out that the benefits these four companies get are four times as big as the taxes they pay! The government is basically giving them money. We can and we must encourage industry in Israel, but their blackmail must stop,” Gal-On wrote on Facebook.

The Meretz leader added that before VAT was raised at all, before the education budget was cut and before the middle class had to cover the deficit, Lapid and Prime Minister Binyamin Netanyahu would have to require these corporations to “pay the billions they stole from us.”

Because the study only examined data through 2010, the Israel Manufacturers Association said the findings were outdated.

“The study’s findings are irrelevant for over two years,” it said.

“An unrestrained assault on four companies does not contribute in any way,” Israel Manufacturers Association president Zvi Oren said. “We should remember that these companies’ contribution to the Israeli economy is invaluable and they employ thousands of workers, many of them in the periphery. Sadly, instead of Israeli society accepting these companies and cherishing their contributions, we attack them.”

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