Israel Tax Authority rebuffs attempts to exploit 2011 export-tax loophole

The phrasing of the investment law allowed companies to reduce their corporate tax from the 2011 rate of 24 percent to either 16% or 9%.

October 3, 2013 22:21
1 minute read.
An accountant [illustrative photo]

An accountant calculator taxes 370. (photo credit: Ivan Alvarado / Reuters)

The Israel Tax Authority on Thursday rebuffed attempts by dozens of non-exporting local companies, allegedly including cement monopoly Nesher, to exploit a capital investment- tax loophole in their 2011 filings meant to promote exports.

The phrasing of the investment law allowed companies to reduce their corporate tax from the 2011 rate of 24 percent to either 16% or 9%, provided that they serviced populations larger than 12 million people, an approximation of the total population in Israel and the Palestinian Authority-controlled territories.

Though the spirit of the law was to provide a break for exporters, the companies attempted to take advantage of the break by arguing that the population in Israel and the territories exceeded 12 million in 2011.

The tax authority said it had already publicly rejected the use of such arguments for 2011. It argued that the population had not yet exceeded the given threshold. In 2013, the Knesset passed an amendment retroactive to 2012 increasing the population threshold to 14 million and automatically increasing the amount annually.

According to Calcalist, the state comptroller is investigating a complaint over the tax filings. Nesher did not respond to requests for comment.

In response to the controversy, Federation of Israeli Chambers of Commerce president Uriel Lynn called for rewriting the law for the encouragement of capital investments in its entirety. The strange formulation using population as a proxy for exporters, he said, was an explicit attempt to circumvent Israel’s World Trade Organization obligations, which preclude giving exporters unfair advantages.

“This law is not only an attempt to mislead international organizations,” Lynn said, it also misleads locally since it does not at all encourage capital investments.

Rather, it is a law that primarily encourages industrial export.”

Instead, he said, the law should be based on the principles of encouraging investment in the periphery and investments by foreign companies that improve Israel’s economy.

The law has been the subject of intense scrutiny since the Finance Ministry revealed in May that in 2010, the 70% of tax breaks outlined in the law went to Israel’s four largest companies – Teva, Intel, Israel Chemicals and Checkpoint – which paid an average effective rate of 3%.

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