After Israel Corporation (TASE: ILCO) stated in its financial report that the total investment in electric car venture Better Place Inc. was $426 million to date, we wondered how and, most of all, when, the company would reach the operating break-even point and profitability.
One supposition was that Better Place had some aces up its sleeve, which would change the electric car market's prospects, giving the electric car a last-minute charge to penetrate the market.
This week, Minister of Environmental Protection Gilad Erdan, rather than Better Place CEO Shay Agassi, revealed one of those aces, when he called on Minister of Finance Yuval Steinitz to grant more tax breaks for environmentally friendly cars. Officially, Erdan's request to Steinitz was for all kinds of alternative powered cars, including hybrids, and charged hybrids. He asked to delay by another year (from 2014 to 2015) the introduction of the purchase tax hike on electric and hybrid cars.
But careful reading of the letter indicates that its real focus is a much more significant request from the Ministry of Finance: a full exemption for users of electric company cars from the monthly use value levy. Erdan wrote, "Hybrid cars currently enjoy a NIS 540 tax break on the use value. Electric cars are ineligible for this break. This tax policy makes it difficult for recipients of company cars to choose an electric car.
"It should be remembered that there are many difficulties facing drivers of electric cars, including the limited travel range between recharging, the location of the batter recharging/replacement points, and limited parking. To help the electric technology enter the market, I believe that a full tax exemption on the monthly use of electric cars should be instituted, or at the least, the break should be equal to the break given for electric cars."
The letter leaves no doubt why it was written just now. "Officials in my ministry are currently working with the Israel Tax Authority to review the possibility of updating the green tax brackets for motor vehicles. We propose setting an additional tax break and postponing the date for raising the tax break on clean cars as part of the general update of the green taxation."
In other words, Erdan is seeking to piggyback on the green taxation update, which is due for release in a few days and takes effect in January 2013.
Converting Erdan's request into numbers reveals that they are not small change, and could provide a major incentive for getting electric cars on the road. The gross use value planned for Better Place's electric Renault Fluence ZE is around NIS 2,900 a month, the same as for most sedans in leasing companies' fleets. A NIS 35,000 tax break a year is a major incentive for employees to replace their Toyotas and Mazdas, even if they are not avid environmentalists and do not have to pay for their gasoline.
An unprecedented tax break
An examination of the numbers also reveals that Erdan's argument about the tax discrimination against the electric car, compared with hybrids, is inaccurate, to put it mildly. Israel currently grants one of the most generous tax breaks in the world for electric cars. The tax break that the public is most familiar with is the reduced purchase tax: 8% on electric cars, compared with 30% on hybrids, and an average of 65% on gasoline and diesel vehicles, saving electric car buyers tens of thousands of shekels.
It should be borne in mind, however, that the use value of an electric car includes a hidden tax break, because Israel is the only country in the world with a conceptual differentiation between the price of the car and the price of the battery, which Better Place owns in its business model. This means that the monthly use value of the Fluence ZE is calculated on the net value of the car alone, and excludes the price of the battery, which is almost as much as the car.
A better comparison with the Nissan Leaf electric car, also produced by the Renault Nissan Alliance, but which has a permanent battery that it cannot be rapidly replaced. The estimated cost of the Nissan Leaf for the Israeli consumer, when it arrives in a few months, will be NIS 150,000-160,000, including the 8% purchase tax. This will more or less be the price of the Renault Fluence ZE with the battery. In Europe, the Fluence ZE costs €26,000 before tax breaks.
Since the full use value of a car is 2.5% of its consumer price, this means that the recipient of a company car will pay at least NIS 3,750 a month. In other words, the tax break on the use value of Better Place's car, by not including the price of the battery, is NIS 750 a month. Hybrids will allegedly face discriminatory tax levies compared with Better Place's car, because their batteries cannot be pulled and replaced.
The ball is now in the Ministry of Finance and the Israel Tax Authority's court, and the decision will not be easy. For one thing, the electric car project was politicized a long time ago. For years, the government and Israel have won considerable personal and national prestige from the project, and Better Place has been a must-see stop for visiting politicians and VIPs. The project's success will undoubtedly be leveraged for political capital.
However, the Ministry of Finance is already under heavy pressure from the market to equalize the tax terms between alternative vehicle motors, in particular to grant a break on the purchase tax and use value of hybrids, natural gas, and LNG-powered cars. These pressures will increase as natural gas becomes more available in Israel in the coming years.
Therefore, for the Ministry of Finance, any additional tax break for the electric car is liable to open the door to similar demands, which will wreck the government's tax revenues. For example, exempting the price of the battery from the price of a car could lead to a demand for an exemption on the purchase tax or use value for the price of a fixed battery in other electric cars.
In principle, there is no reason why someone should not demand an exemption for the price of a car's air conditioner (which is a mandatory item), or for critical safety systems, and so on. This may seem fantastical, but all it will take is a clever lawyer to prove that the state is unjustly discriminating between different motor vehicle technologies.
The Ministry of Finance has another problem as well. The green taxation update will raise the prices for many small and energy-efficient gasoline-powered cars, which have enjoyed generous tax breaks for the past three years. If this happens, these cars will be doubly discriminated against compared with electric cars: both on the purchase tax and on the higher use value due to the cars' higher price. Since small and energy-efficient cars are considered green by every accepted international standard, their manufacturers might well file official complaints of discrimination.
On second thought, a new equilibrium may emerge in Israel. From the perspective of the average Israeli salaried employee who receives a company car, the tax break amounts to an extra NIS 36,000 in disposable income a year, which can easily subsidize the annual maintenance cost of a second or third gasoline-powered car at home. This will pay for the disadvantages of the electric car. However, it is very doubtful if this is the intent behind the incentives for the electric car.
Published by Globes [online], Israel business news - www.globes-online.com - on June 19, 2012
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