At the last minute, two representatives of the Ministry of National Infrastructures, Energy and Water Resources on the Sheshinski 2 committee examining the state's take from exploitation of Israel's natural resources have decided to join the minority opinion of Ministry of the Economy director-general Amit Lang, who says that the committee's recommendations are too extreme in their repercussions for producers and manufacturers, chiefly Israel Chemicals Ltd. (TASE: ICL).
The defection of the two, Orna Hozman-Bechor, director general of the Ministry of National Infrastructures, Energy and Water Resources, and the director of the Natural Resources Administration at the ministry, Yossi Wurtzburger, was received with surprise and disappointment by the members of the majority on the committee. At the same time, the objections of the three members who form the minority indicate that the conclusions of the committee have not been dramatically softened, as was being claimed in some of the press and media this morning.
The Committee for the Review of Policy with Respect to Royalties on Natural Resources, or by its shortened name Sheshinski 2, will officially present its final recommendations at 1 pm today, to Minister of Finance Yair Lapid, and will then present them to the media. The focus of attention will be on the changes introduced into the committee's interim recommendations after the heavy pressure exerted by Israel Chemicals and other companies that felt injured by the recommendations.
The committee did not hide its preparedness to soften the recommendations, given the fear of a severe blow to Israel Chemicals plants that provide jobs for thousands of families in the Western Negev and the Arava in the south of Israel. Israel Chemicals announced that it would close its magnesium plant on January 1, 2017, the day the fiscal changes that the committee recommended would be due to come into force, and also announced a streamlining plan at Bromine Compounds involving the layoffs of hundreds of workers.
The committee estimates that the financial consequence of the changes that have been introduced to the recommendations is a reduction in the state's expected revenue of 20-25%, or about NIS 400 million annually.
The government take from the profits of Israel Chemicals and other extractors of natural resources (chiefly copper) will henceforth be 42-56%. This is made up of a 5% royalty on turnover, Companies Tax of 26.5%, and a new levy of 25-42%. The reason that the total is lower than the sum of the three elements is that the royalties are imposed on sales rather than on profits, and are recognized as an expense for the purposes of calculating the levy, while the levy itself is recognized as an expense in calculating Companies Tax.
The most significant change that the committee made to its interim recommendations is the splitting of the surtax to be imposed on mining products into two bands. Instead of a 42% tax, a graduated tax will be imposed. The first level will be 25%, and the second 42%. Another important change is the raising of the guaranteed return for natural resources producers from 11% in the interim report to 14%. The profitability figures for calculating the tax will be taken from the producers' financial statements.
The committee also took steps to reduce the harm to factories making derivative products based on Dead Sea minerals extraction. So, for example, Companies Tax will continue to be levied at a reduced rate of 9% on such plants, headed by the magnesium plant and Bromine Compounds. To implement this, the government will probably have to amend the Income Tax Ordinance in addition to the special law on taxation of natural resources that will be required if the government decides to adopt the committee's recommendations.
Published by Globes [online], Israel business news - www.globes-online.com - on October 20, 2014
© Copyright of Globes Publisher Itonut (1983) Ltd. 2014