Sheshinski 2 panel backs 42% surtax on natural resource exploitation

Public’s share of annual profits – arising from its own resources – among lowest in world, forum finds.

Tamar natural gas rig 521 (photo credit: Albatross)
Tamar natural gas rig 521
(photo credit: Albatross)
Imposing a surtax of 42 percent on the excess profits of natural resource exploiters would boost the state’s coffers with NIS 500 million annually, an interministerial committee concluded on Sunday.
The Sheshinski 2 Committee, headed by Prof. Eytan Sheshinski, was tasked last year with examining the state’s royalty policies for the exploitation of natural resources – except for oil and gas, whose royalty policies were determined in the first Sheshinski Committee.
Companies exploiting the country’s natural resources should be charged a tax rate on all excess profits – also known as a surtax – of 42 percent, the Sheshinski 2 Committee recommended on Sunday.
The first Sheshinski Committee, whose recommendations received Knesset approval in March 2011, determined a new taxation method for the exploitation of Israeli hydrocarbons, resources that did not come under review in Sheshinski 2.
Keeping gas and oil royalty rates intact at 12.5 percent, the first committee’s legislation increased profit levies initially to 20 percent, enabling them to eventually rise to 60 percent by means of an “R-factor” formula – with net cumulative revenues divided by exploration and development expenses.
The purpose of establishing the second committee, an initiative of Finance Minister Yair Lapid, was to ensure that the state is receiving proper compensation for private use of national natural resources.
The structure of the tax system on natural resources in Israel does not guarantee that the public is receiving an appropriate portion of the profits arising from its own resources, the committee determined.
According to a report drafted by the International Monetary Fund for the committee, Israel’s taxation model on natural resources causes the public profit share to be among the lowest in the world.
The public portion of profits arising from mineral mining in Israel has stood at 23 percent for the past seven years, whereas the public portion of profits from gas and oil amounts to more than 50 percent, the committee said.
The tax rate should be calculated according to a model based on profit reports and accounting losses, which will be collected only after the company is ensured a rate of return of 11 percent on its assets, the committee said.
Raising the surtax to 42 percent would likely increase the portion of the rate that the public receives by a margin of 46 percent to 57 percent.
In addition to evaluating tax rates, Sheshinski 2 also assessed royalty rates on non-hydrocarbon natural resources, which range between 2 percent and 10 percent.
Members of Sheshinski 2 recommended setting a uniform royalty rate on all natural resources in Israel of 5 percent, which would be consistent with global conditions and also ensure a steady revenue stream.
If the Sheshinski Committee’s recommendations are approved, the royalty rate would be calculated differently from before, such that there would be no allowance for deducting refining and processing expenses from royalty payments, the committee said.
Following a series of public hearings, the Sheshinski 2 Committee is to present its final report to the finance minister.
With regards to Dead Sea Works specifically, the committee recommended that the suggested terms be applied to the company beginning only on January 1, 2017.
This extended period would help the firm adapt to the proposed fiscal regime and maintain the funds necessary for the ongoing Dead Sea salt harvest project, the committee said.
Until the new terms would be applied, the committee recommended that the Dead Sea Works royalty rate be in accordance with what the government and the company agreed upon in 2012 – 10 percent royalties for any amount of potash in excess of 1.5 million tons.
Israel Chemicals responded to the recommendations by freezing an investment program worth more than $1 billion, protesting that high taxes would reduce its competitive edge in the global market.
If the recommendations were to be adopted, the company said it would be forced to cut costs, meaning lay off workers.
ICL, the third largest company traded on the Tel Aviv Stock Exchange, is one of the central employers in the Negev, and more than 30,000 families make their living off the company one way or another, according to a spokesman.
According to Gil Bashan, an energy analyst at IBI Investment House, the deal would reduce ICL’s worth by $1.96b., but much of that was already taken into account by investors.
The fact that the recommendations would not take effect until 2017 would also give it time to respond.
In direct contrast with ICL, representatives of Adam Teva V’Din (Israel Union for Environmental Defense) criticized the 42 percent surplus profits tax rate as “extremely low.”
“The Sheshinski 2 Committee published conservative conclusions that still do not reflect a full share of natural resources for the public and in fact allow the continued abuse of the Dead Sea and other natural resources,” said Dana Tabachnik, the head of economics and natural resources at Adam Teva V’Din.
Tabachnik also criticized the committee for neglecting to develop a mechanism to monitor and impose a unique taxation on exports of natural resources, which would ensure that the state receives proper taxes and full information on the natural resources sector.
Tabachnik and MK Dov Henin (Hadash) said that full royalty rates must be applied also to downstream products, not just to the mineral resources.
A portion of all the proceeds that the public receives from natural resource development should be designated for environmental technology research purposes, in order to decrease dependency on such resources, Tabachnik added.
Lastly, Tabachnik criticized Sheshinski 2 Committee members for claiming that the changes would boost the state’s coffers with about NIS 500m. annually, but without disclosing how they calculated this sum.
“It cannot be that the Sheshinski Committee will act without transparency, and must publish immediately for the public all the numerical data on the basis of which public revenues were calculated,” Tabachnik said.