The Sheshinski Committee will recommend the imposition of a special tax on oil and gas produced in Israel instead of raising royalties, it emerges from the committee's most recent discussions.
The inclination to favor a tax is in accordance with the position of professional consultants to the committee, who oppose raising royalty rates, in part because of the legal difficulties involved in a retroactive rise, and also because the method is considered obsolete and regressive. In addition, the committee prefers to impose a tax on profits, while royalties are collected on revenue.
Each reserve separately
The Sheshinski Committee resumed its hearings yesterday (Monday), after the holidays. The committee is not expected to finish its work before the middle of next month. In recent discussions, a model has taken shape that the Ministry of Finance is promoting, whereby each reserve will be taxed separately, rather than tax being imposed on the oil and gas partnerships.
For example, the tax will be calculated separately for the "Tamar" reserve and for the "Leviathan" prospect, despite both being held by Noble Energy and the Avner and Delek Drilling partnerships. This method harms partnerships, that until now could offset expenses in one reserve against profits from another.
According to the proposal being formulated, the tax rate imposed on the reserve will be progressive, and will be determined by weighting several variables, including the profitability of the reservoir, drilling depth, and the fossil fuel type derived from the reservoir.
For example, it is proposed to impose a higher tax on oil than on natural gas, because production of natural gas requires high capital investment in infrastructure for transport to customers, whereas oil can in principle be sold from the wellhead.
The head of the Tax Authority, Yehuda Nesardyshi, who is a committee member, expressed reservations about the proposed taxation method, because of its technical complexities. The Tax Authority prefers the existing system, in which tax is levied on the partnerships engaged in drilling.
Published by Globes [online], Israel business news - www.globes-online.com - on October 5, 2010
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