State committee recommends softer approach to natural resource surtax

The Sheshinski 2 Committee was tasked last year by Lapid with examining the state’s taxation and royalty policies for the exploitation of natural resources.

By SHARON UDASIN
IEI's exploratory oil shale drilling site at Zoharim (photo credit: SHARON UDASIN)
IEI's exploratory oil shale drilling site at Zoharim
(photo credit: SHARON UDASIN)
Arousing the ire of industrialists and environmentalists alike, the Sheshinski 2 Committee published its final recommendations on policies for taxing natural resources, softening its approach from a previous draft.
Finance Minister Yair Lapid tasked the committee, headed by economist Eytan Sheshinski, a professor emeritus at the Hebrew University of Jerusalem, last year with examining the state’s taxation and royalty policies for the exploitation of natural resources – excluding oil and gas, where the policies were previously determined by another panel Sheshinski headed.
The recommendations would apply to all firms developing the country’s resources, although much of the discussion focused on the largest stakeholder – Israel Corporation’s Israel Chemicals (ICL), which mines potash from the Dead Sea as well as phosphates and bromine in the Negev.
As the committee unveiled its recommendations on Monday, ICL slammed the terms as destructive to company operations while environmentalists claimed its members had succumbed to corporate pressure.
The final report mandates that companies exploiting the country’s natural resources be charged a graduated tax rate on all “excess profits” – known as a surtax – of between 25 and 42 percent, rather than a fixed 42% surtax, as was called for in the committee’s interim report, delivered in May.
Maintaining their initial position on royalties, committee members recommended setting a uniform of 5%.
If adopted, these changes would come into effect on January 1, 2017, and would boost the state’s coffers by NIS 400 million annually – NIS 100m. less than what was forecast under the proposal released in May. The expected government take from the new recommendations would be 46-55% of revenue, the Finance Ministry said.
Rather than imposing a uniform 42% surtax rate on excess profits, the new recommendations stipulate that an annual rate of return for the company involved of 14-20% would warrant a surtax of 25%, while a rate of return above 20% would result in a surtax of 42%.
The recommendations would ensure, however, that the company would receive at least 14%, rather than the 11% that was indicated in the interim report.
Royalty rates for natural resource exploitation, which today range between 2% and 10% based on mineral type, would stand at a uniform rate of 5% – which committee members determined is consistent with global conditions.
According to a Globes report, the committee’s recommendations would actually allow ICL to pay the state less than it does at present, as long as its rate of return remains below 14%.
Reworking Israel’s natural resource taxation system was critical to ensure that the public would receive an appropriate portion of the profits, the Finance Ministry said.
Citing a report drafted by the International Monetary Fund for the committee, the Sheshinski 2 members argued that Israel’s current resource taxation model caused the public’s profit share to be among the lowest in the world. The public’s share of profits arising from mineral mining in Israel has stood at 23% for the past seven years, whereas its share from profits from gas and oil amounts to more than 50%, the committee said.
“For decades, the public did not get what it deserved until the committee was established,” Lapid said. “Government after government has gone by, but no one has thought to do anything about this issue.”
From 2006 to 2012, ICL annually transferred to its shareholders about $500m. in royalties, and to the government about $60m., Lapid said.
“This stops here and now,” he continued. “The bulk of the profits that enabled this dividend distribution lies in the ground. This ground first and foremost belongs to the Israeli citizen. I don’t begrudge anyone – this is a free country and I have no problem with businessmen making money, but these gaps are unreasonable.”
Emphasizing that he did not intend to harm factory operations or places of employment, and that the economy must remain attractive to investors, Lapid said the government’s job under these circumstances was to “create a fair game in which money does not stay among a wealthy few, but reaches the public.”
“This is what the committee was asked to do, and this is what the committee has done,” he said.
All money that enters the state’s coffers contributes to lowering the cost of living, Lapid added, describing the current conditions as “intolerable.”
“I am well aware of attempts to intimidate us and the public, to threaten [us] with factory closures or layoffs,” the minister said. “There is no reason to fire even one employee, and I suggest everyone to lay off this tone. These efforts will not succeed.”
Lapid was referring to several recent threats made by ICL in response to the Sheshinski 2 Committee’s May interim report.
After hearing those recommendations, the company responded by freezing an investment program worth more than $1 billion, protesting that the high taxes would reduce its competitive edge globally. At the time it said that such changes would necessitate cost-cutting and layoffs.
At the beginning of September, ICL announced plans to close its magnesium factory near the Dead Sea in 2017. The factory employs 550 people, about 10% of the company’s total workforce. The company also discussed plans to downsize its bromine plant in the Negev, which employs another 1,200 people.
Also in early September, ICL formed a cooperation with the Louisiana-based Albermarle Corporation for the production of flame retardants based on bromine derivatives.
In response to the final report by Sheshinski 2, the company said an initial reading indicated its recommendations “have not been altered in a substantive manner that would allow ICL to implement the investment plans in Israel that it intended to execute” before the panel’s establishment.
“The results of the committee’s conclusions impose on ICL’s operations in Israel the highest tax burden in the world, substantially more than in any other country on the globe that engages in the production of potash, phosphate and bromine natural resources,” a company statement said. “The unavoidable result of this is not only a severe and unjustified blow to ICL, but also a severe blow to Israel’s economy in general, and to that of the Negev in particular – all the more so in light of the recession and the slowdown in industry.”
Priding itself upon acting as “the business and social backbone of the Negev,” ICL said in its statement that it was being forced to consider canceling an additional NIS 3.5b. in investments beyond the NIS 2.5b. that had already been axed. If the company’s revenues are decreased, the government take for the public will also drop dramatically, the company argued.
“It is clear to all that the committee on taxing natural resources was, in fact, a committee to tax ICL, because no other company in Israel will be affected by the committee’s recommendations,” the statement said. “ICL believes that the recommendations must be shelved in order to prevent the damage that is anticipated from their implementation.”
Three of the 14 members of the Sheshinski 2 Committee – Economy Ministry director-general Amit Lang; National Infrastructures, Energy and Water Ministry director-general Orna Hozman-Bechor; and Natural Resources Administration director Yossi Wurtzburger – expressed reservations about the final recommendations.
In a joint letter, the three said that while they agreed in principle with imposing a surtax on excess profits for natural resource exploitation, they feared the committee’s recommendations might discourage investment in Israel.
The committee members did not spend enough time evaluating the impacts on employment, they wrote.
To maintain a balance between the need to increase the state’s revenues and to remain attractive to investors, the recommendations should have guaranteed that the government take would not exceed 48%, they said.
At the other end of the spectrum, green groups were also displeased.
Amit Bracha, executive director of Adam Teva V’Din (Israel Union for Environmental Defense), accused the committee members of “yielding to the pressure of ICL, which is in large part responsible for the huge damage caused to the Dead Sea in recent years.”
Adam Teva V’Din and the Movement for Quality Government joined MK Dov Henin (Hadash) in calling for the establishment of a parliamentary inquiry to examine the many questions they felt remained unanswered about environmental and social costs.
Henin accused ICL of succeeding in softening the interim recommendations of Sheshinski 2.
“Today has proved once again that there is no choice but to implement an in-depth and widespread investigation of this scandal of abandoning Israel’s natural resources to the tycoons,” he said.
Niv Elis contributed to this report.