Tax on oil, gas profits will rise to two thirds

Prof. Eitan Sheshinski: State's share is far behind global norm; Steinitz: We must ensure we use our resource windfall wisely.

By OMER RABIN/GLOBES
November 10, 2010 21:10
3 minute read.
Illustrative photo

311_offshore oil well. (photo credit: Associated Press)

This evening, the Sheshinski committee presented its intermediate recommendations on royalties payable to the state on gas and oil discoveries. Publication of the recommendations was brought forward at the request of Israel Securities Authority chairman Zohar Goshen. It had been scheduled for next week.

The Sheshinski committee's main recommendations are that the royalty rate remains the same, the depletion allowance is abolished and a gas and oil profits levy is introduced. The levy does not apply to the first years of production: eight years for medium to large reserves; fifteen years for small reserves. Reserves where profits are small will hardly be affected.

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The overall level of taxation will be two thirds over the life of a project for a profitable project. The levy will apply only after payback of the investment plus 50%. It will apply to each reserve separately. At a profit rate of 50% on the investment in the project, the taxation rate will be 20%. From 230% profit and upwards, the maximum taxation rate will be 60%.

The limits on the levy will not include export facilities. The levy will not be collected until the ratio between accumulated revenues on the one hand and expenses, royalties and the levy on the other reaches 5:1.

These recommendations confirm an earlier expose by Globes. They were unanimous.

"In comparison with the current system of taxation on the various components, no significant change is expected in the amount of payments to the state in the first years of operation of any reserve," the summary of the intermediate report says. "The growth in the state's share of revenue is mostly in the later years of the life of a reserve, and so the impact on the ability to repay debt and establish the reserve is low."

Projects with a lower level of profitability will pay less, while highly profitable projects will pay the maximum rate. "The state and the public's share in the net profit, after payback of the investment, from the sale of gas and oil will rise from one third to two thirds," the report states.

The committee determined that the proposed changes should apply from now to all oil and gas reserves, since it was a matter of taxation of future profits. This means that the changes will also apply to the "Tamar" reserve.

Minister of Finance Yuval Steinitz opened the press conference by saying, "The Sheshinski committee has, in the past several months, been dealing with one of the most important macro-economic issues in Israel… It would be hard to overestimate the importance of these discoveries to our future and to our ability to finance the defense of the country, and to ensure education at the highest levels for our sons and daughters." Steinitz thanked Prof. Eitan Sheshinski for standing up to the pressures that had been brought to bear on him. "I thank you for volunteering for this national mission," he said.

Steintz stressed that the recommendations were a draft and not final, but concluded, "I must stand forcefully by the right of Israel's citizens to benefit from its natural treasures in accordance with normal criteria in the developed world." Prof. Sheshinski himself also stressed the international comparison.

"We are an extreme country, in that the government does not receive a return in accordance with the global standards that apply in countries to which we should like to compare ourselves Britain, Norway, the US. We are a long way behind these countries." He added however, "It is important that incentives should continue to attract exploration, and so we must allow them to receive a fair return."

On the depletion allowance, Sheshinski said, "I saw no grounds for it, and no country that gives a depletion allowance on a resource that is given without consideration being paid. It is unambiguously clear that the depletion allowance should be abolished. In the US, it makes sense. There, a developer pays for the resource, and as it depletes, he receives a benefit accordingly. Here, he does not pay for the resource, so where is the logic in it?"

Amiram Barkat, and Adi Ben-Israel contributed to this report.


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