Sources inform ''Globes'' that the Ministry of Finance is expected to reduce the tax break for companies in central Israel under the Law for the Encouragement of Capital Investment by several percentage points. Top ministry officials confirmed the report.
Yesterday, "Globes" reported that Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) received a NIS 3 billion tax break in 2011, the largest tax break ever granted to a single company.
The sources said that Ministry of Finance staff work includes reviewing tax exemptions, after top officials concluded that there was no choice but to reduce them, because of the NIS 20 billion budget cut which will have to be made in the next two years, on top of a NIS 5 billion tax hike. Most top ministry officials support the current Law for the Encouragement of Capital Investment and its tax breaks.
Under the law, companies eligible for tax breaks pay a 7% rate in the periphery and a 15% in central Israel. These rates are due to fall 6% and 12%, respectively in 2015. Under the pending proposal, the companies tax rate for companies in central Israel will rise to near the average OECD rate of 25%, the same rate as the general companies tax in Israel. The companies tax rate for companies in the periphery is not expected to change.
Top Ministry of Finance officials say that even if more amendments are made to the Law for the Encouragement of Capital Investment in the area of tax breaks, they will have no immediate effect, nor will they solve the deficit problem in the next two years. They will solve the structural deficit which has affected the Israeli economy for several years. This is because the government is contractually bound to the companies to grant the tax breaks and cannot reopen the agreements.
The Ministry of Finance says that the Law for the Encouragement of Capital Investment is a good and important law, which should be kept, because it attracts foreign investment to Israel. Israel faces stiff competition from other countries with very high human capital and an easier geopolitical environment. The ministry also slams the attitude which looks at the size of the tax breaks, and wants to focus on the amount of income.
"70% of the increase in tax breaks under the Law for the Encouragement of Capital Investment was due to sharp increase in companies' revenue, not from a reduction in the tax rate," says a top Ministry of Finance official. "If companies make higher profits, that's good. We should not forget that every company that comes to Israel increases tax revenues because it pays individual taxes. Besides, it should not be forgotten that the decision by a multinational to invest here is dichotomous decision: either it builds a factory, or not. There is no construction of half a plant, hence the importance of the tax breaks."
Published by Globes [online], Israel business news - www.globes-online.com - on March 12, 2013
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